Paid-Up Capital

Definition

Paid-in capital refers to the amount of money a company raises directly from investors by selling its stock. It is created when a company sells its shares directly to investors in the primary market, typically through an Initial Public Offering (IPO).

Origin

The concept of paid-in capital originated from the basic need for corporate financing and evolved with the development of capital markets. In the late 19th and early 20th centuries, with the rise of stock markets, paid-in capital became a crucial method for companies to raise funds.

Categories and Features

Paid-in capital is mainly divided into common stock paid-in capital and preferred stock paid-in capital. Common stock paid-in capital represents funds raised by selling common shares, where investors usually have voting rights and dividend entitlements. Preferred stock paid-in capital is raised through the sale of preferred shares, where holders typically have priority over common shareholders in dividend distribution and liquidation.

Case Studies

A typical example is Alibaba Group's Initial Public Offering (IPO) in 2014, which raised about $25 billion in paid-in capital, making it one of the largest IPOs globally at the time. Another example is Facebook's IPO in 2012, which raised approximately $16 billion in paid-in capital, used for company expansion and technology investments.

Common Issues

Investors often misunderstand the relationship between paid-in capital and a company's total market value. Paid-in capital only refers to the funds raised directly through stock issuance, while market value is the result of the current stock price multiplied by the total number of shares. Additionally, transactions in the secondary market do not affect paid-in capital, as the proceeds from these trades go to the selling shareholders, not the company.