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.]

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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.

Par value

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

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.

Key Takeaways

  • 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.