What Exactly Is Additional Paid-In Capital?
What is additional paid in the capital? If you’ve ever heard that question asked, you were likely hanging out and talking to investors, one of whom might understand some of the finer point and details of equities. Many come into the stock market thinking it’s as simple as buy and hold or buy low and sell high, but you probably know yourself that this area of the economy is far more complicated than that.
In a nutshell, additional paid-in capital is the difference between par value subtracted from issue price and then multiplied by the number of shares issued. That’s the formula, anyway, but keep reading for more explanation. Additional paid-in capital is sometimes hyphenated as additional paid-in-capital. It’s a representation of any excess paid by the investor that is more than the par-value price of the issued stock. It can happen for common stock, but it can also apply to a preferred stock. If you want to find it in a company’s balance sheet, look for the shareholders’ equity section and then look for the contributed surplus account for the information, as this is where it’s often included.
Debt and equity both get offered to investors routinely as financial products. Like any other product, there is a cost to make that product. The business looking to make money does so by selling their products for profit. That’s basically what additional paid in capital is, the profit made on common stock. It might be alternatively called contributed capital more than par, but that doesn’t have quite the same ring to it, does it? There’s a difference between the cost of the share and the selling price of a share, which is higher. The difference is a book value of net profit. Par value is the cost of the share in question, and it’s printed onto the actual stock certificate. Additional paid-in capital, therefore, is the numerical amount that investors have paid the business more than the par value. It’s essential to know that additional paid in the capital only gets recorded at the very initial public offering where the stock is first available. Any transactions that happen after an IPO don’t increase the additional paid-in capital account.
Par values are sometimes hard to understand themselves. They’re supposed to represent the cost per share of stock, but the numbers are often arbitrary. In fact, many businesses set their par values at a penny per share. That’s largely done to comply with some state laws that ban businesses from selling any shares under their par value. A few states even let businesses offer stock shares that have no par value whatsoever.
As stated earlier, you might have heard another investor once ask what additional paid in capital is. However, you might have also had the same thought yourself if your broker, financial advisor, or portfolio manager was going over things with you one day. In either case, now that you’ve read this article, you have a good idea what it is and how it matters and works.