Companies typically issue common or preferred stock to raise money for various things, such as debt repayments and company expansion. The company’s amount in exchange for selling shares is known as paid-in capital or contributed capital. However, it only includes what the company raises on the primary market and not what shareholders spend in the secondary market when they sell their shares to other investors.
You can find paid-in capital on a balance sheet of any company that avails such information to the public. Typically, it appears as a total amount that all the investors have contributed instead of listing individual contributions.
Most examples of stockholders’ equity within the balance sheets usually include that information. But to understand it, you must know terms like common and preferred stock. Also, it would be best if you understood what par value and in excess of par value are. And then, you can calculate paid-in capital by simply looking at the financial reports.
Common vs. Preferred Stock
Both common and preferred stock is sold to an investor when a company wants to raise money and is willing to offer equity. But they have several differences.
Common stock (share capital) tends to be pretty volatile but with a higher potential for making money. Also, it enables shareholders to vote based on the number of shares they hold and get paid dividends from company earnings if the business does well. However, their shares cannot be converted to preferred shares. But shareholders of the stock can resell them at a higher price to make profits.
On the other hand, preferred shares (preference shares) are less volatile but may limit how much money investors make, while providing investors with equity. So, they will buy shares and get fixed dividends at fixed intervals for a specific period.
In addition, a preferred stockholder will also receive company earnings before the common stockholder. And in the event of bankruptcy, the company is obligated to pay them before paying common stock owners. However, preferred stock does not have voting rights.
Par Value and In Excess Of Par Value
A stock’s par value is the value that a company sets within its charter for one common share. It is also known as the nominal or face value. And when you multiply this value by all the shares a company issues, you will get the minimum capital it can raise through that issuance.
What you pay when investing in company stock may be different from its par value. Usually, the value is used when companies issue preferred stock, influencing the dividend you get per share.
But for common stock, the nominal value indicates the minimum amount the company can sell its shares for. And that amount is usually very low – one cent or even lower.
However, some company stocks have a no par value, which means there is no minimum number for each share. Therefore, if the stock falls below that price, shareholders do not have to worry about being liable to creditors if the company goes broke.
On the other hand, in excess of par value refers to a stock price difference between the higher purchase price of a stock and its face value price. Where the par value is zero, the in excess par value is the stock price when the company issues its shares.
Therefore, paid-in capital in excess of par value means the difference between what a company would have made selling its issued shares at face value and what it has made selling its shares at higher than par value, which is considered a fair market price. It will be shown in the additional paid-in capital (share premium) category.
Calculate Paid-In Capital Using Balance Sheet
Paid-in capital includes the raised capital in excess of par value and what is raised at par value when a company sells preferred and common stock. Below are steps that can help you calculate this capital from the balance sheet.
- Start by finding the balance sheet of the company you are interested in. You can search for it on the company’s website in the investor relations section, and through financial sites like the Wall Street Journal or Market Watch.
- Look for the stockholders’ equity section, which is usually found after the liabilities accounts section in the balance sheet.
- Read through the section and determine whether the total paid-in capital is included as a line item. If it is, there is no need to calculate the value, simply take note of it. If it is not included as a line item, you have to calculate it. So, move to the next step.
- Identify the common stock category, its par value and check out or calculate the raised dollar amount.
- Identify the preferred stock category, its par value and pinpoint or calculate the raised dollar amount.
- Identify the additional paid-in capital category. It may also be referred to as paid-in capital in excess of par value. And it may be listed individually for the preferred and common stock or generally if one type of stock was issued.
- Get the sum of the additional paid-in capital, the par value paid-in capital from common stock and the par value paid-in capital from preferred stock. That sum is the total paid-in capital the company has made from issuing shares to investors on the primary market.
Exploring Example 1
Suppose company ABC had a paid-in capital at par value of $30,000 from preferred stock and $60,000 from common stock. In that case, its total paid-in capital generated by shares it sold at par value would be $90,000.
And also suppose it also had a paid-in capital in excess of par value of $2,500,000 for preferred stock and $5,000,000 for common stock. In that case, its additional paid-in capital would be $7,500,000.
Therefore, company ABC’s total paid-in capital based on the balance sheet information would be $7,590,000.
Exploring Example 2
A firm had common stock ($0.60 in par value) of $250,000 in 2019, and common stock ($0.60 in par value) of $400,000 in 2020. The same firm had capital surplus (or additional paid-in capital) of $3,200,000 in 2019, and $5,650,000 in 2020. What was the total proceeds from the sales of new shares?
If new shares only refer to those sold in 2020, the firm would be said to have a paid-in capital of $400,000 + $5,650,000, which totals $6,050,000.
Once you understand what's going on in the stockholders' equity section, you can calculate the paid-in capital from year to year and get an idea of how the company is performing.
- Upcounsel: Paid in Capital: Everything You Need to Know
- Corporate Finance Institute: What are Common vs. Preferred Shares?
- Lumen Learning: Rules and Rights of Common and Preferred Stock
- Accounting Tools: Par value definition
- NOLO: What Is Par Value Stock?
- My Accounting Course: What Does Paid-In Capital in Excess of Par Mean?
- AccountingTools: Additional paid-in capital definition
- CliffNotes: The Balance Sheet: Stockholders' Equity
- Compare a company's paid-in capital with that of its competitor to identify what investors have contributed. With all else being equal, a company with greater paid-in capital has more money with which it can grow its operations.
- A company's total paid-in capital differs from the market value of its stock, which changes daily.
I have been a freelance writer since 2011. When I am not writing, I enjoy reading, watching cooking and lifestyle shows, and fantasizing about world travels.