January 29, 2022

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Meaning of Shares Premium and key Explanations

Meaning of Share Premium and key Explanations
Shares

Share premium is a source of fund to a company. Private and public companies can issue shares to raise funds. When this is done, the shares may be issued at par price, at a discount or at a premium. The issued price depends on the calculated value of the entity or investors perceived value. What is share premium? And how can the fund be utilized?

Definition — What is Shares Premium?

1. It is a share price paid by shareholders and investors higher than the registered or par or nominal price.
2. Share premium is the issued price of a company’s shares that is higher than the par price.

Key Explanations

Share or issued price. The issued or share value is the market price of the shares. It is the amount investors are willing to pay for the company’s value. Normally, the higher the value of a corporation the higher the share price. However, certain companies may enjoy overprice shares even though their value is low.

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Coinbase is an example here. The company’s share price grew but its Price Earning Ratio remains the same, according to the tweet below. This is because investors have a perceived value. They believe that the company’s worth will increase in the long run.

Shareholders and Investors. These are agents with excess funds and are looking for companies to invest in. Shareholders are the real owners of a company. Investors can be individuals’ investors or institutional investors.

Registered price. It is the price stated in the memorandum of association of the entity. This is the amount agreed by the founders or promoters of the company for it shares. Also called par or nominal price.

Premium price. The difference between the issued amount and the nominal price. Here, the issued price must be higher than the face (par) value.

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Type of reserves. Share premium is a capital reserve. This implies that it is not available for distribution to shareholders as dividends. However, it can be used in the ways listed below.

Uses of Security Premium

To pay bonus shares. The company’s directors decide to reward shareholders with shares. Instead of dividends (or in addition to it) bonus shares can be issued to them. It is from shares premium the bonus is issued.

Redeeming preference shares and bond. Preference stocks and bonds that are redeemable may be redeem by the money available in security premium.

Share buy back. The company may decide to buy it shares from the stock exchange market. This arises when the price of the stock falls below expectation. And investors are not buying them. The company can Therefore buy it’s stocks through the fund in the share premium account.

Meet contingencies. Where contingencies arise, the company can use part of the fund in the share premium reserve account to settle those issues. Thereby saving the entity form borrowing additional funds.

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Where to locate Shares Premium in a Financial Report

You can locate this account in the shareholders fund segment in a statement of financial position. It is usually below Equity shares capital. The snapshot of Dangote annual report, share premium is a line item under the Equity section below.

Meaning of Share Premium and key Explanations

Conclusion

In conclusion, security or shares premium is the difference between the issue price and par price of a stock. The excess money is not available for distribution to shareholders as dividend. However, it can be used for contingencies, stock buyback, redemption of fixed income capital and pay bonus shares.

Shares