Difference Between Par Value and No Par Value Stock
Author: James Clark
What differentiates a par value and no par value stock?
A company that has issued a stock needs to fix a par value for the stock. The category is generally used to define the stock value and has no bearing on the overall price of the stock in the market. The par value of the stock is the value stated per share.
The price used to be printed on stock certificates of paper before it became obsolete and new electronic versions were introduced. If the company hasn't fixed a par value, the certificates will become no-par value stocks.
Most people tend to get confused between par value and no-par value stocks, and if you are one of them, you have come to the right place. We will discuss the difference between the two right here.
Par Value Stocks
The reason companies sell a stock is to generate equity capital. That is why the par value has to be multiplied by the number of issued shares and the minimum money generated if all the shares are sold by the company. The par value used to be printed on paper stock certificates that have become outdated today.
State law requires that companies fix a par value for their stock, so most of them choose the smallest value possible, which is one cent. The stock par value creates a two-way contract for the shareholder and the company.
Suppose the issuing company fails to meet its obligations and shareholders are paying less than the stock's par value. In that case, the creditors may sue the shareholders to recoup the debt for the difference of the par value and the share price. If the stock's market price is less than the par value, the difference will be covered by the company to pay the shareholders.
That is the reason why most companies set a minimum par value for their stock so that they can avoid both these situations.
Par Value Stocks
It is required by law in most states that companies must set a par value for their stock. If the company chooses not to do that, they may issue "no-par" stocks to shareholders. The "no-par" grade means the company hasn't set a minimum value for its stock. That is why no-par stocks don't carry any liabilities since no baseline value is set for the stock.
However, since most companies are required to set a minimum value for their shares, it effectively means that there is little difference between par value and no-par value stock.
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