What is additional paid-up capital?
Additional paid-up capital (APIC) is an accounting term referring to the money that an investor pays above the nominal price of a share. Often called “contributed capital greater than par”, APIC occurs when an investor buys newly issued shares directly from a company during its IPO. As a result, APICs, which are detailed under “equity” on a balance sheet, are seen as profit opportunities for companies, which receive excess cash from shareholders.
[Important: Additional paid-in-capital is recorded at the initial public offering (IPO) only; the transactions that occur after the IPO do not increase the additional paid-in capital account.]
How does the additional paid-up capital work?
Investors can pay any amount above par
During its IPO, a company has the right to set the price of its shares that it deems appropriate. In the meantime, investors can choose to pay any amount greater than the declared face value of a stock price, which generates additional paid-up capital.
Suppose that during its IPO phase, the company XYZ Widget issues one million shares, with a nominal value of $ 1 per share, and that investors bid on the shares for $ 2, $ 4 and $ 10 – above the nominal value. Suppose further that these shares eventually sell for $ 11, which makes $ 11 million for the company. In this case, the additional paid-up capital is $ 10 million ($ 11 million less the face value of $ 1 million). As a result, the company’s balance sheet details $ 1 million in “paid-up capital” and $ 10 million in “additional paid-up capital”.
And after the IPO?
Once a stock is traded on the secondary market, an investor can pay whatever the market will bear. When investors buy shares directly from a given company, that company receives and keeps the funds as paid-up capital. But after this period, when investors buy stocks on the open market, the funds generated go directly into the pockets of investors who sell their positions.
Better understand paid-up capital
Additional paid-up capital is an accounting term, the amount of which is generally recognized in the equity section of the balance sheet.
Since the additional paid-up capital represents money paid to the company, above the nominal value of a security, it is essential to understand what the peer really means. Simply put, “by” means the value that a company assigns to the stock at the time of its IPO, even before there is a market for security. Issuers traditionally set the face value of shares at a deliberately low level – in some cases as little as a penny per share, in order to preventively prevent any potential legal liability, which could arise if the share falls below of its nominal value.
Market value is the actual price that a financial instrument is worth at a given time. The stock market determines the real value of a stock, which changes continuously, as stocks are bought and sold throughout the trading day. Thus, investors earn money from the changing value of a stock over time, depending on the performance of the company and investor sentiment.
Key points to remember
- The additional paid-up capital is the difference between the nominal value of a share and the price that investors actually pay for it.
- To be an “additional” paid-up capital, an investor must buy the stock directly from the company during its initial public offering.
- The additional paid-up capital is generally recognized in equity on the balance sheet.
Why is the additional paid-up capital important?
For ordinary shares, the paid-up capital consists of the nominal value of a share and additional paid-up capital – the latter being able to provide a substantial part of the share capital of a company, before the retained earnings start to s ‘accumulate. This capital provides a layer of defense against potential losses, in the event that retained earnings begin to show a deficit.