Definition
Share Premium refers to the additional amount that investors are willing to pay over and above the nominal value of the shares during their issuance. This premium reflects the perceived additional value that shareholders see in the company not captured by the nominal share price alone.
When a company issues shares at a price higher than their nominal (or par) value, the excess is credited to an account known as the Share Premium Account, which forms part of the company’s equity but cannot be used directly to pay shareholders dividends. Instead, it is typically used for purposes that enhance shareholder value indirectly, such as financing mergers and acquisitions, buying back shares to increase the value of remaining shares, or issuing bonus shares in a scrip issue.
Practical Usage
In the everyday theatre of corporate finance, the share premium account is like the backstage where all the makeup and costumes (read: financial strategies) are stored, ready to beautify (optimize) the company’s financials when the curtain rises (during fiscal planning times). While not the star of the show, share premium can steal the spotlight by funding those dramatic scrip issues or by having a cameo in a buy-back saga. How glamorous!
Related Terms
- Nominal Value: The face value of a share, which is often lower than market value.
- Scrip Issue: Also known as a bonus issue, it involves issuing additional shares to shareholders instead of paying dividends.
- Equity Financing: The process of raising capital through the sale of shares.
- Capital Reserves: Reserves that a company can use for legally specified purposes, including the share premium account.
For Further Reading
Delving deeper into the financial nuances of share premiums and their strategic implications, consider adding these authoritative texts to your library:
- “Corporate Finance” by Jonathan Berk and Peter DeMarzo – A comprehensive guide on finance from a corporate perspective.
- “Principles of Financial Engineering” by Salih N. Neftci – Offers insights into crafting strategic financial solutions including equity financing.
Whether you’re into amassing fortunes, or just enjoy counting other people’s money from afar (we don’t judge), understanding the role and tactical use of share premium can add a feather to your savvy investor’s cap—or at least give you something fancy to talk about at parties!
