Additional paid in capital is the amount investors pay for a company’s stock above the stated par value. Par value is the dollar amount of a company’s stock during the initial public offering (IPO) process. After the IPO, private investors may choose to purchase the company’s stock at a higher market rate. The difference between the current market price and the par value is the additional paid in capital paid by investors. Common or preferred stock with zero par value has no additional paid in capital when sold at the current market price. The entire sales amount is credited to the company’s common stock issued account.
A company's balance sheet lists the additional paid in capital. In the US, state laws often require companies to list the par value and paid in capital amounts separately on their balance sheets. This separation helps investors understand how much extra money has been collected when issuing common or preferred stock. Another common term for these amounts is stated capital. High amounts of stated capital may indicate private investors are willing to pay more money for a company’s stock, regardless of the stated par value.
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Stated capital usually has little or no meaning in the valuation of a company’s total wealth. It’s simply an accounting rule meant to separate less important financial information from more important financial information. For example, additional paid in capital listed on the balance sheet is included with the retained earnings of the company. Retained earnings are the cumulative net income from business operations since the company was incorporated. Companies may choose to pay dividends or buy back outstanding stock from its retained earnings.
Because private investors usually invest their money into a corporation outside of the normal stock market procedures, they are usually first in line for having stock bought back by the company. When this occurs, companies offer private investors a stated price for repurchasing shares of stock; this amount is usually higher than what the investors paid for the stock. When the stock repurchase transaction is complete, the company removes the outstanding stock’s par value amount and additional paid in capital from its balance sheet. Amounts exceeding the book value of this information are deducted from the company’s retained earnings. These transactions are usually recorded regarding the sale of stock to private investors, not mutual funds or investment groups.