Par value of a stock is the per share value mentioned in the articles of incorporation. Articles of incorporation (also known as the articles of association and corporate charter) is a document that provides the detailed information about corporate objectives, corporate business and other key information about corporation. This document is prepared by the founders of corporation and submitted to the registrar or secretary of the state for approval. Other documents from where a stock’s per share par value can be seen include share certificates issued to the shareholders and stockholders’ equity section of the corporate’s balance sheet.
Most of the country’s (and states in USA) don’t permit corporations to issue shares below the par value. Because of this reason, many corporations assign a very low par value to their stock to avoid any trouble in issuing shares in future. For example, the par value per share of Amazon’s common stock is $0.01. Similarly, common stock of Apple and Microsoft have a par value of $0.00001 and $0.00000625 per share respectively.
Par value has very little to no influence on the market value of a company’s shares. Once the shares have been issued by the company in initial public offering (IPO), they continue to be traded in the secondary market where their current or future market value is determined.
Other names used for the par value of shares include face value and stated value.
Definitions and explanations
Par value stock:
The stock or share to which the company assigns a par value is known as par value stock or par value share. In many countries (and states in USA), the companies are legally required to assign a par value to each of their share. It is, therefore, most commonly issued type of stock worldwide. As stated earlier, the share’s par value can be seen on the stock certificate, balance sheet and corporate charter.
No par value stock:
The stock or share to which the company does not assign any par value is known as no par value stock or no par value share. Some states in USA allow companies to issue stock without a par value. In case of no par value stock, you cannot find an explicitly stated par value on share certificate, balance sheet or corporate charter. Generally, a no par value stock certificate has words “No Par Value” printed on it.
Difference between par value and no par value stock
The main points of difference between par value and no par value stock have been explained below:
1. Basic difference:
The par value stock is the stock to which the issuer company allocates a specific value on stock certificate. The stock is issued at par value usually at the time of an initial public offering (IPO) which is the first issue of stock when a company commences its operations. Once the stock is issued, it is very unlikely that it will be traded between investors on par value. Stock price fluctuates due to the activity of stock market in which it is traded. The market thus determines a new stock value known as the market value of stock. On the other hand, no par value stock is a stock to which the issuer company does not allocate any value as its initial value at the time of issue. However, some no par value stock may have a minimum stated value which is the minimum possible price at which a company can issue stock.
The par value of a stock is the minimum amount of investment at which that stock can be bought from the market. In real life practice, stocks once issued do not remain on their par value and are traded according to their market value, but still technically the par value is the value of stocks which a company owes to its shareholders. So, effectively if a stock is issued with a par value the relevant company will have to pay back shareholders their money if the price of stocks falls below this value usually in case of bankruptcy. However, if a company issues stock without any par value, there is no minimum liability that the company owes to its shareholders and the price of stock is determined according to the price that the investors are willing to pay.
For example, management of Atco. Co. Ltd. decides to issue stocks in a stock market. The plans of the company for possible issue are:
|Number of shares||100,000|
|Par value per share||$0.01|
|Market value per share||$5.6|
If the company, issues stock without any par value the minimum price that investors will be willing to pay for the stock will be the market value of the stock, so stock issued will be recorded as follows:
If this stock is issued based on its par value, the company will still charge investors market value for its shares because it is likely to be the fair value of that stock. In this case, the amount will be segregated between common stock and additional paid-in capital (also known as share premium). The following journal entry exemplifies this issue:
Debit: Cash – $560,000
Credit: Common stock – $1,000
Credit: Additional paid-in capital – $559,000
This clearly indicates that the par value of these shares is $1,000 and in any case the investor will have to pay a minimum of this value for the issued shares.
4. Practical application:
The common practice of most of the industrialized jurisdictions is that stocks are issued on their par value, but laws in many jurisdictions allow the issue of no par value shares. Nevertheless, the nature of shares and economic benefits attached to them do not change but no par value, in effect diminishes the minimum legal liability from a company towards its stockholders.
Par value vs no par value stock – tabular comparison
A tabular comparison of par value and no par value stock is given below:
|Stock that is issued with a face value.||Stock that is issued without a face value.|
|Par value is the legal minimum amount of a stock.||This type of stock does not carry a minimum legal amount.|
|It is the normally used practice to issue shares with a par value.||No par value approach can be used to issue shares if law of relevant jurisdiction allows.|
Conclusion – par value stock vs no-par value stock:
In an initial public offering (IPO), shares are mostly issued at or above their par value. This par value is set very low by companies to effectively minimize the amount of its theoretical liability towards stockholders. Technically, it doesn’t impact the investors whether they buy shares on par value or no par value because in essence investors will always be paying the market determined value of stock and the returns that investors get by these investments will also be calculated according to market value. However, the legal value of their investments will be different in both cases and company will record both of these issues differently in their books. One important aspect is that stocks are always traded on their market value, but it does not change its par value. Par value of a stock can change in a situation of stock split where the number of shares are decreased and the total investment is divided on the new number of shares which technically does not change the valuation of the aggregate stocks. Par value can also change in a stock consolidation which is total opposite of stock split.