Additional Paid In Capital
Also called APIC, this is the sum of money paid by investors over the initial par value of the shares sold
Additional Paid-In Capital Details
Private corporations hold offerings of shares and stocks to the general public, known as Initial Public Offerings (IPO). These events are vastly important to investors since the IPO typically comes with share premiums. During these IPOs, a public buyer will usually pay an additional amount than the set price of a stock. We often refer to such a rise in value as additional paid-in capital.
This part of the shareholder's equity is usually a pointer about how much value a share has and how much of an additional amount investors are willing to pay for it. Additional capital is only present in purchases from the primary market, meaning directly from the private company. The par value, or "ask" value of these private stocks, is usually not that high. The reason for that is so that the company can record the excess amount paid as APIC.
Investors who decide to pay over the firm's declared set price on the stock generate the additional paid-in capital. All that extra profit made from investors paying over the par value is considered the additional paid-in capital. Once in a secondary market, whatever money the stock generates goes to the investor's pockets.
Examples of Additional Paid-in Capital
There is a formula that is commonly used that calculates the APIC of stock, according to the Corporate Finance Institute, and it is (Issue Price - Par Value) x Number of Shares Acquired by Investors. Par value is the designated price a company has assigned to its shares at the time of an IPO, whereas the issue price is the value that the share reached by the end of the bidding by investors. First, let's take a look at a simple explanation as to what the APIC physically is.
Let's assume that during the IPO phase of a company, the company sets one million shares at $2. Investors begin to bid, and ultimately, the stocks end up selling for $10. The total sum finishes at $10,000,000, making the additional paid-in capital (subtracting the $2 million par value to the $10 million) $8,000,000. The math is quite simple, making this quite easy to calculate.
On a more specific and realistic example, a company will set their shares at the low price of $0.01 and decided to sell 100,000 shares (for the sake of justifying the example, in 2019, Beyond Meat Inc. set their prices at $0.0001 per share and ended up selling for $25). If the issue value peaked at $15 and sold all shares, then the APIC of this company will be (15 - 0.01) x 100,000 = $1,499,000. You can regularly see these types of IPOs in the stock market. A company will usually set its par values extremely low to get the bidding going instead of giving it a price that can be analyzed and considered profitable or not.