What Is Additional Paid-In Capital?
Additional paid-in capital (APIC), is an accounting term referring to money an investor pays above and beyond the par value price of a stock. Often referred to as "contributed capital in excess of par”, APIC occurs when an investor buys newly-issued shares, directly from a company, during its initial public offering (IPO) stage. Therefore, APICs, which are itemized under the “shareholder’s equity” section of a balance sheet, are viewed as profit opportunities for companies, who receive excess cash from stockholders.
[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.]
Additional Paid-In Capital
How Does Additional Paid-In Capital Work?
Investors may pay any amount greater than par
During its IPO, a firm is entitled to set any price for its stock that it sees fit. Meanwhile, investors may elect to pay any amount above this declared par value of a share price, which generates the additional paid-in capital.
Let us assume that during its IPO phase, the XYZ Widget Company issues one million shares of stock, with a par value of $1 per share, and that investors bid on shares for $2, $4, and $10 above the par value. Let us further assume that those shares ultimately sell for $11, consequently making the company $11 million. In this instance, the additional paid-in capital is $10 million ($11 million minus the par value of $1 million). Therefore, the company’s balance sheet itemizes $1 million as "paid-in-capital," and $10 million as "additional paid-in capital".
And after the IPO?
Once a stock trades in the secondary market, an investor may pay whatever the market will bear. When investors buy shares directly from a given company, that corporation receives and retains the funds as paid-in-capital. But after that time, when investors buy shares in the open market, the generated funds go directly into the pockets of the investors selling off their positions.
Understanding Additional Paid-In Capital Further
Adds to shareholders' equity
Additional paid-in capital is an accounting term, whose amount is generally booked in the shareholders' equity (SE) section of the balance sheet.
Due to the fact that additional paid-in capital represents money paid to the company, above the par value of a security, it is essential to understand what par actually means. Simply put, “par” signifies the value a company assigns to stock at the time of its IPO, before there is even a market for the security. Issuers traditionally set stock par values deliberately low—in some cases as little as a penny per share, in order to preemptively avoid any potential legal liability, which might occur if the stock dips below its par value.
Market value is the actual price a financial instrument is worth at any given time. The stock market determines the real value of a stock, which shifts continuously, as shares are bought and sold throughout the trading day. Thus, investors make money on the changing value of a stock over time, based on company performance and investor sentiment.
- Additional paid-in capital is the difference between the par value of a stock and the price that investors actually pay for it.
- To be "additional" paid-in capital, an investor must buy the stock directly from the company at its IPO.
- The additional paid-in capital is usually booked as shareholders' equity on the balance sheet.
Why Is Additional Paid-In Capital Important?
For common stock, paid-in-capital consists of a stock's par value and additional paid-in capital--the latter of which may provide a substantial portion of a company's equity capital, before retained earnings begin to accumulate. This capital provides a layer of defense against potential losses, in the event that retained earnings begin to show a deficit.