No par value stock is shares that have been issued without a par value listed on the face of the stock certificate. Historically, par value used to be the price at which a company initially sold its shares. There is a theoretical liability by a company to its shareholders if the market price of its stock falls below the par value for the difference between the market price of the stock and the par value.
Companies set the par value as low as possible in order to avoid this theoretical liability. It is common to see par values set at $0.01 per share, which is the smallest unit of currency. Some states allow companies to issue shares with no par value at all, which eliminates the theoretical liability payable by the issuer to shareholders. If common stock has no par value, a company prints "no par value" on the face of any stock certificates that it issues.
When a company has no par value stock, there is effectively no minimum baseline from which to price the stock, so the price is instead determined by the amount that investors are willing to pay, based on their perceived value of the issuing entity; this may be based on a number of factors, such as cash flows, the competitiveness of the industry, and changes in technology.
When a company sells no par value stock to investors, it debits cash received, and credits the common stock account. If a company had instead sold common stock to investors that had a par value, then it would credit the common stock account up to the amount of the par value of the shares sold, and it would credit the additional paid-in capital account in the amount of any additional price paid by investors in excess of the par value of the stock.
For example, ABC International sells 1,000 shares of no par value stock to investors for $10 per share. It records the transaction with this entry:
If ABC had instead issued the shares with a par value of $0.01, then the transaction would be recorded as:
|Additional paid-in capital||9,990|
The general trend among state governments is to allow the use of no par value stock, since the practice of issuing par value stock at the absolute minimum amount has essentially eliminated the reason for having par value. Thus, we may eventually see the elimination of the par value concept as it relates to company stock.
The use of no par stock does not apply to other types of securities, such as bonds, where the par value is essentially the same as the face value of the instrument.
No par value stock is also known as no par stock.