Paid-in capital is the amount of money that is raised, or paid in, as the result of a capital stock offering. It represents the par value — the stated value of the stock at the time of issue — of the stock. Any amount that is paid by purchasers of the new issue that is over and above the par value is referred to as additional paid-in capital.
Both of these types of capital represent equity in the company, and as such, appear in the stockholder’s equity section of the firm’s balance sheet. Paid-in capital can also be referred to as stated capital. It and additional paid-in capital combined are sometimes referred to as contributed capital.
Because investors often pay a premium over par value for stock when it is first issued, this additional capital is often a better measurement of the amount of money raised by an issue, particularly when the issue is for shares of common stock. This is because common stock usually has a nominal par value, often $1 US Dollar (USD) per share or less. Shares of preferred stock often have a par value closer to the share’s actual value, so the paid-in capital of a preferred stock issue would more closely reflect the amount of capital that is actually raised. In either case, the combination of both types of capital represent the total amount of capital that the stock offering produced.
Recapitalization, or restructuring a company’s ratio of debt to equity, can affect the amount of money raised. If a company issues stock in order to pay off debt, paid-in capital will go up. Companies will sometimes buy back stock in order to reduce their cash, especially if they are expecting a hostile takeover bid and want to appear less attractive. This type of transaction does not affect the capital because it does not change the amount of money that was generated from a new stock issue.
Note that this figure is the result of original stock issues only. The increase or decrease in the value of the stock as it is traded is not reflected in this measure. If the price of the stock goes up, the increased value represents earnings to the investor, while a decrease in the stock price represents a loss to the investor. Of course, if a company’s stock increases in value, it improves the company’s ability to issue additional stock and raise more capital. Paid-in capital can only increase if the company issues new shares of stock.