Definition
A share issued at a premium refers to a share that is sold at a price higher than its par value. This price, known as the issue price, exceeds the nominal or face value of the share. The excess amount, termed as the premium, represents the additional cost investors are willing to pay over the par value of the share. This premium is typically recorded in a separate account, known as a share premium account, which reflects the extra value received over the legal capital.
Share Premium Account
The share premium account holds the excess received from issuing shares above their par value and is an equity account on the balance sheet. It is a crucial component of the equity structure in a company, as these funds are often used for lawful purposes such as issuing bonus shares, writing off preliminary expenses, or as a reserve for future needs.
Why Issue Shares at a Premium?
Issuing shares at a premium is a strategic maneuver employed by companies perceived to have higher worth. This strategy not only harnesses additional capital but also aids in portraying a sense of value and market confidence in the company. Investors are generally ready to pay a premium for shares in a company that demonstrates potential for robust growth, strong fundamentals, or has a strategic market advantage.
Legal and Financial Implications
Legally, the issue of shares at a premium is tightly regulated, ensuring that the premium amount is used appropriately and increases the company’s financial base without inflating its issued capital. Financially, it provides a company with a cushion of funds that do not carry an obligation of repayment, unlike debt.
Related Terms
- Par Value: The nominal or face value of a share as stated in the corporate charter.
- Issue Price: The price at which shares are offered to the public or existing shareholders.
- Share Premium Account: A component of the shareholders’ equity on a company’s balance sheet, representing the premium paid by investors above the par value of shares.
- Bonus Issue: Free additional shares given to existing shareholders funded from the share premium account.
Recommended Reading
To delve deeper into the mechanics of share issuance and premium pricing, consider the following texts:
- Securities Analysis by Benjamin Graham and David Dodd: A comprehensive guide to the analysis of stocks including aspects of premium share issuance.
- Corporate Finance by Jonathan Berk and Peter DeMarzo: Offers insights into financing decisions, including the strategic issuance of shares at a premium.
Issuing shares at a premium can seem like hosting a party where everyone wants the VIP ticket—it not only makes the party look good; it also fills up the coffers! So next time a company issues shares at a premium, remember, it’s not just selling part of itself—it’s selling its potential in a glitzy wrapper!
