In around two minutes you will know what is Additional Paid In Capital. You will get both professional definition and easy explanation. No intro, no outro, straight to the point.

► My 212 Companies Watchlist: [ Ссылка ]
► Get $10 for Opening an Investment Account with Wealthsimple (Canada, USA, UK): [ Ссылка ]
► Book FREE 15 Minutes Call "The Power of Investments": [ Ссылка ]
► Download my FREE eBook about Investments: [ Ссылка ]
► Follow Me On Instagram: [ Ссылка ]

Additional paid-In Capital is an accounting term for an excessive amount that investors pay above the face value of a stock.

Additional paid-in capital is recorded under shareholders’ equity section on a balance sheet. And if you are not sure what shareholders’ equity or a balance sheet means, feel free to watch my previous videos.

Additional paid-in capital happens only during a company’s IPO. Let’s assume, that a company issues its shares for the first time and sets the price to be $50 per share.

During an IPO some shares were purchased directly from the company at $60 per share. $50 will be recorded under common stock account on a balance sheet. And excessive amount of $10 per share goes under additional paid-in capital.

The reason why additional paid-in capital is only taken into consideration during an IPO is the following.

Think about purchasing a car. A dealership bought a car from a manufacturer for $30,000. And then it sells this car to customers for $38,000. These additional $8,000 is the profit that dealer wants to keep.

As soon as the car is sold, its first owner drives it for a couple of years. Decades later, this car became a very rare model, therefore its price increased. So, the first owner decided to sell it above its purchase price.

New price tag is $70,000. And when the first owner finds a buyer and sells his car, he is the only one that gets to keep the money. Dealership and manufacturer of the car gets nothing from this transaction. They got their money at the time of initial sale and that’s it.

Same with the stocks. A company receives money directly from its investors only during an IPO. All the other trades that are made with the shares are not affecting the amount of capital that was raised. If a company raised $50 million during an IPO and the price was $50 per share, this $50 million will not turn into $70 million if the share price increases to $70 one year later.

So, like mentioned previously, if during an IPO the price has been set to $50, every dollar that investors paid above $50 goes under additional paid-in capital.

All the transactions that happen after an IPO that affect the share price will not count towards additional paid-in capital. Because these transactions happen on the secondary market between investors. Not between an issuing company and investors anymore.

If you find my content interesting, please consider subscribing to my channel. It helps a lot as a beginner creator. And let me know if there is anything you would like to know about personal finances and investing.

свернуть