What is Additional Paid In Capital (APIC)?
Definition: Additional paid-in capital (APIC) is the amount of money that a company’s shareholders pay for shares in excess of the par value of the shares. In other words, it’s the amount over the par value that investors are willing to pay for the stock. This metric appears on the shareholder’s equity section of the balance sheet.
What Does Additional Paid In Capital Mean?
What is the definition of additional paid-in capital? APIC is any payment received by a firm’s shareholders above the par value of the stock. The par value is usually very low, i.e. at $0.01, so that most of the amount paid in by each investor in excess of this value is recorded as APIC. APIC applies both to common stocks and preferred stocks. To calculate the additional paid-in-capital we need to know the number of shares outstanding, the issue price and the par value.
For example, a company may issue its shares for $1 each. However, investors may be willing to pay $2 per share to invest in the company. Additional paid-in capital represents the extra $1 investors paid to the company above its original $1 par value.
On the public markets, this is most often seen when a company holds an IPO, though companies whose shares are already trading can also issue more shares in order to raise capital. In the case of an IPO, a company may set its initial price at $20 with plans to issue 100 million shares. Once trading, if those shares sell higher as the day goes on, going for an average of $25 per share, then the extra capital raised at the higher price would be considered additional paid-in capital.
This calculation only includes shares sold by the company to raise capital. If the shares are sold, but don’t provide capital to the company, those proceeds won’t appear on the company’s financial statements, and are therefore not paid-in capital of any kind.
The calculation of APIC
The basic formula to calculate additional paid-in capital is:
APIC = (Issue price - Par value) x Shares outstanding
In our hypothetical IPO above, we can apply the formula to calculate additional paid-in capital.
First, we subtract the par value (or the price the company originally set when the market opened) from the issue price (which is the price the market actually paid). In this case, that is $25 minus $20. Next, we multiply that difference by the 100 million shares, giving us additional paid-in capital of $500 million as of the company’s IPO day.
After the IPO, none of the daily stock movements will have an impact on the additional paid-in capital number in this example. This is because those trades do not generate any capital for the company, and therefore they have no impact on the company’s balance sheet. Only the shares sold by the company to raise capital should be included in the calculation.
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.
Why does Additional Paid in Capital matter?
Additional paid-in capital reveals how much investors have poured into the company. That’s not something anybody can see on the income statement or the cash flow statement, but it’s important if you want to know how much shareholders have paid to play and want to ponder whether management has used that money wisely.
- 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.