A share premium can be explained in the context of financial transactions in the business world. Specifically, in companies where stocks or shares are issued. A share premium, also known as securities premium, is the extra amount received by a corporation above the par value of its shares when they are sold in the primary market. To put it more simply, it’s the difference in amount between the face value of a stock (the price printed on the stock certificate itself) and the amount received by the company when the stock is sold. For instance, if a company sells a share with a face value of $20 at a price of $30, the share premium is $10.
The generated income from share premiums can’t be distributed as dividends, instead, it’s typically used to write off the company’s expenses like commissions, underwriting costs, or discounts allowed on the issue of shares or debentures. It may also be utilized to finance expansions, new projects, or in the distribution of bonus shares to the existing shareholders. Overall, a share premium represents the willingness of investors to pay above the face value for the company’s shares, indicating their confidence in its future prospects.
Related Questions
1. What is Par Value?
Par value is the nominal or face value of a bond, share of stock, or a coupon as indicated by its certificate. Essentially, it’s the minimum price per share a corporation can issue and sell shares for, as set by the company’s charter. Although it has little connection to the market price of a share.
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2. How is a Share Premium Account represented on a Balance Sheet?
A Share Premium Account is shown under the header of ‘Reserves and Surplus’ in the shareholder’s equity section on the company’s balance sheet. It represents the extra money received over and above the face value of shares.
3. What happens if a company sells shares below the Par Value?
If a company sells shares below par value, it’s referred to as issuing shares at a discount. This is generally not allowed, due to the potential of it being used to defraud investors. It can erode the company’s capital and put investor’s rights at risk.
4. What are the different uses of Share Premium Account?
The Share Premium Account can be used for a few specific purposes like writing off preliminary expenses, writing off the costs of issue of shares or debentures, and issuing bonus shares to the existing shareholders.
5. Are shareholders allowed to withdraw money from the Share Premium Account?
The shareholders are not allowed to withdraw money from the Share Premium Account. The funds are typically used for the company’s growth and expansion or to enhance its operations, not for distribution as a dividend.