The par value of a stock is the stated value per share as outlined in the issuing company’s charter. Also called “face value” (because it’s the value printed on the face of a bond or stock certificate), the par value of a stock represents the minimum amount that must be paid per share. The difference between par and no par value stocks, therefore, is the presence or absence of this baseline valuation.
Companies sell stock as a means of generating equity capital, so the par value multiplied by the total number of shares issued is the minimum amount of capital that will be generated by selling all the shares. However, the par value of stock constitutes a binding, two-way contract between the company and the shareholder.
On one hand, if shareholders pay less than the par value for a share of stock and the issuing company later becomes unable to meet its financial obligations, its creditors can require that shareholders pay the difference between the purchase price and the par value as a means of fulfilling the company’s unpaid debts. On the other hand, if the market price of the stock falls below the par value, the company may be liable to shareholders for the difference. To circumvent both these scenarios, most companies issue stock with very low par values, often one cent.
For example, if company ABC issues 1,000 shares of stock with a par value of $50, then the minimum amount of equity that should be generated by the sale of those shares is $50,000. Since the market value of stock has virtually nothing to do with par value, it is possible for investors to purchase this stock on the open market for considerably less than $50. Assume all 1,000 shares are purchased below par, say $30, generating only $30,000 in equity. If the business goes under and cannot meet its financial obligations, shareholders can be held liable for the $20-per-share difference between par and the purchase price.
In some states, companies are allowed to issue stock with no stated par value. No par value stocks do not carry any of these theoretical liabilities since there is no baseline value per share. However, since most companies use such low par values to begin with, the effect of this difference is minimal.
In most cases, the par value of stock is little more than an accounting concern, a relatively minor one. The only financial effect of a no par value issuance is that any equity funding generated by the sale of no par value stock is credited to the common stock account, while funds from the sale of par value stock is divided between the common stock account and the paid in capital account.