What Is Share Premium?
Share premium is the excess amount a company receives from shareholders over and above the nominal (par) value of its shares at the time of issuance. It is also known as Additional Paid-In Capital (APIC) in some jurisdictions.
For example, if a company issues a share with a par value of ₦1 and investors are willing to pay ₦5 for it, the extra ₦4 is recorded as share premium.
The share premium account is reported under the Equity section of a company’s balance sheet, separate from share capital. It reflects the confidence investors have in the company’s future potential and market value.
Formula for Share Premium
The standard formula for calculating share premium is:
Share Premium = (Issue Price per Share – Par Value per Share) × Number of Shares Issued
This simple formula helps companies clearly separate their legal share capital from the additional value contributed by investors.
Step-by-Step Example of Share Premium
Let’s look at a practical example to understand share premium better.
Company Alpha issues 1,000,000 ordinary shares with a par value of ₦1 per share. Due to strong market interest, the shares are issued at ₦3 per share.
Step 1 – Calculate total amount received:
1,000,000 × ₦3 = ₦3,000,000
Step 2 – Calculate nominal share capital:
1,000,000 × ₦1 = ₦1,000,000
Step 3 – Calculate share premium:
₦3,000,000 – ₦1,000,000 = ₦2,000,000
This means the company records:
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Share Capital = ₦1,000,000
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Share Premium = ₦2,000,000
The share premium strengthens the company’s equity base without increasing debt.
Importance and Uses of Share Premium
The share premium account is not just extra money; it serves very important purposes:
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Strengthens equity base: It provides additional funds without borrowing.
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Statutory uses: In many countries, share premium can only be used for specific purposes such as:
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Issuing fully paid bonus shares
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Writing off preliminary expenses
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Covering underwriting costs
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Paying premiums on redemption of preference shares or debentures
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Indicator of investor confidence: A high share premium shows that investors believe strongly in the company’s future.
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Supports expansion: It can support growth plans, research and development, and acquisitions, depending on company laws.
Mini Case Study: Share Premium in Action
TechNova Ltd., a fast-growing startup, issues 5,000,000 shares with a par value of ₦1 per share. Due to strong investor demand, the shares are sold at ₦10 per share.
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Total proceeds = 5,000,000 × ₦10 = ₦50,000,000
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Nominal share capital = 5,000,000 × ₦1 = ₦5,000,000
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Share Premium = ₦45,000,000
On the balance sheet, TechNova reports ₦5 million as share capital and ₦45 million as share premium. This shows strong investor trust and gives the company the ability to grow without relying heavily on loans.
The concept of share premium is more than just an accounting figure; it is a powerful reflection of how investors perceive a company’s value, future potential, and market credibility. When investors are willing to pay above the nominal value of a company’s shares, it signals trust in the company’s leadership, strategy, and capacity for long-term growth. This makes share premium an essential element in understanding company valuation and financial strength.
For businesses, properly managing share premium helps strengthen the equity structure without increasing debt obligations. It allows companies to fund expansion, innovation, infrastructure, and strategic opportunities without putting pressure on cash flow or relying heavily on loans. This is why strong companies focus not only on share capital but also on building a healthy share premium reserve.
For investors and financial professionals, understanding share premium provides deeper insight into market sentiment and company performance. A strong share premium often indicates high demand for a company’s shares, positive brand reputation, and promising growth prospects. This knowledge can improve investment decisions, financial analysis, and risk assessment.
In today’s competitive business environment, companies that understand and strategically use share premium are better positioned to scale, attract high-value investors, and build long-term stability. Whether you are an entrepreneur raising capital, a student learning corporate finance, or a professional analysing financial statements, mastering the concept of share premium gives you a strong advantage in understanding real business value.
Ultimately, share premium represents confidence, opportunity, and growth. It shows how the market truly values a business beyond its nominal structure. By learning and applying this concept correctly, individuals and organisations can make smarter financial decisions, unlock new opportunities, and create sustainable wealth over time.
At BFI Insights, we help professionals, entrepreneurs, and businesses understand complex financial concepts in simple, practical ways.
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