Definition:
Additional paid-in capital is the excess amount of money that investors pay for common stock above its par value. It represents the premium paid by investors when the stock is issued.
Key points about additional paid-in capital:
- Par value: Par value is a nominal value assigned to a share of stock. It has little to no relation to the stock’s market value.
- Premium: The difference between the issue price of a stock and its par value is the premium.
- Equity: Additional paid-in capital is a component of the shareholders’ equity section of a company’s balance sheet.
- Dividends: Additional paid-in capital is not eligible for dividend payments.
Why is additional paid-in capital important?
- Equity financing: It’s a source of equity financing for a company.
- Financial statements: It’s reported on the balance sheet as a component of shareholders’ equity.
- Valuation: It can affect a company’s valuation and market capitalization.
In essence, additional paid-in capital is the premium paid by investors when they purchase common stock, and it’s a valuable source of equity financing for companies.
