An accounting concept that measures the amount a company raises from a stock sale above what the stock was worth when it was first issued.
So if a company sells stock in an initial public offering at $10 per share, and then the price rises to $15 per share, that extra $5 per share gets booked as additional paid-in capital. A gift. Like the booties mom throws in to the Christmas package as an extra to the sweater and underwear packs.
This concept only applies when the company sells shares at a higher price than the original issuing amount (this initial price is known as the "par value" for the stock). It also only comes into play when the shares are sold to raise capital. If both those conditions apply, the value of the shares above the par value is booked as additional paid-in capital on the firm's financial statements.
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Finance: What is Equity?44 Views
Finance a la Shmoop what is equity well its ownership that's
what here's equity here's equity and here's [Vehicle with a paid sticker on the windscreen]
equity this is your equity in the pie your share of ownership your one
ten-millionth ownership of whatever dot-com which just went public example
you buy a home for 500 grand putting down a hundred thousand dollars and [Chalkboard with price of a home in front of a house]
taking out a loan or mortgage of four hundred grand over the next eight years
you pay down that mortgage to be just three hundred grand and in the mean time [A payment chart graph]
the value of your house has grown to seven hundred grand
someone actually knocks on your door and offers to pay you that much in cash that [Man knocks on door and offers to pay for the house]
day all right what's your equity ownership in the house worth well you
have seven hundred grand as the price of the thing you own you have three hundred
grand in loans against it so if you sell you have to pay back the loans generally
speaking and you're left with four hundred grand as the value of the equity
you have in your home so let's spin things differently instead of the bank [A number wheel spinning]
loaning you debt money to buy your home the bank decides to partner with you as
[Bank shakes a womans hand] a co investing equity player well together you buy a condominium for 250
grand with you putting down 100k and the bank putting down 150 K both in equity
time passes tick tick tick and you sell the condo a decade later for $500,000 [Woman sells condo for $500,000 and hands over apartment]
okay now who gets what well now the bank was your equity partner instead of your
debt partner or lender so when you bought the condo you owned a hundred
divided by 250 of it or 40% and the bank owned a hundred fifty over 250 of it or [Woman doing math calculations on a chalkboard]
60% nothing changed your ownership stakes remained flat at forty sixty so now
at 500 K you sell and you keep 40 percent or two hundred thousand dollars
and the bank keeps sixty percent of five hundred K or three hundred grand and you [Woman and bank stand as dollar signs fall from the sky]
both doubled your money and note the power of debt or leverage in this model
had the bank loaned you the 150 K as debt instead of being your equity [Bank hands money to woman]
partner you would have probably paid off $50,000 or so of that loan in the ten
years you had it so you'd owe a remaining hundred
thousand dollars but you'd have sold it for the same five hundred grand and
after paying off the loan you'd have four hundred thousand dollars in your
pocket instead of two hundred thousands and yes there were interest payments
that went along the way as well as upkeep and risk and other things but in [Interest payments of 351,000 dollars on chalkboard]
theory you could have rented the home and hopefully you'd have broken even in
rational real estate rental market sorry we usually don't put that much math in [Lots of numbers on a pie as girl takes a slice]
our pie
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