A premium share is a new share of a company that is issued at a price higher than par value. It is used in some capital increases and this type of issue is called above par.
Premium shares are normal shares that are issued for a value greater than their nominal value. The owner of a share of this type has the same rights as any other shareholder since it is the same type of financial asset.
The rights to which we mention, are participation in the general meeting of shareholders and the collection of dividends.
Why are premium shares issued?
When a company decides to issue premium shares, it is mainly due to two reasons:
- The first of these is for the company to obtain extra financing. In addition to entering the part corresponding to the capital increase, you will receive an extra percentage for the share premium.
- Second, another objective is to avoid harming investors who already own the company. When a capital increase is carried out, the company’s shares are depreciated, except in extraordinary situations. By issuing an issue above par value, the decline in the price of old shares is reduced or eliminated.
What is the share premium?
A share represents an aliquot part of the capital stock of a certain company. This proportion is the nominal value of the share and is the minimum price at which it could be issued. The issue premium is the difference between the par value of a new share and its issue price.
On the other hand, when premium shares are issued it is because the company’s business is already in operation, its main investments made, and it has a portfolio of clients. In addition to this, the initial investors are not interested in new shareholders entering by paying the same price for the company’s shares as they did at the beginning of its trajectory. Therefore, a surcharge is set and accumulated in the company’s reserves.
Finally, if the value of the share premium is zero, it is considered to be a par issue. If, on the other hand, it is greater than zero, it is called emission over par. Along the same lines, the opposite of a premium stock is a discounted stock (below par).
How is the share premium calculated?
To obtain the value of the share premium we must perform a very simple calculation. The nominal value (NP) of the share must be subtracted from the issue value (EV) of the same:
Share premium = VE – VN
The result obtained is the premium to be paid by the new shareholders, to avoid the dilution effect and that the old investors see their shares depreciate.
Value of shares with premium
Premium shares are an equity financial instrument. They are considered normal shares of a company and once they are acquired by the investor, their price becomes the market price.
Consequently, the price of premium shares will only be fixed at the time of issue. Subsequently, it will be subject to fluctuations whether the company is publicly traded or not.
Example of a premium share
Suppose we are the CEO of a technology company listed on the NASDAQ. We want to carry out a new artificial intelligence project in order to automate the production processes of our company by 15%. Successfully achieving this transformation will allow the company to obtain 30% more profits at the end of the year.
To do this, we need an extra $ 300 million that we decided to obtain through a capital increase. Our shares have a market price of $ 100 / share and with this new issue the shares have a par value of $ 80. In this sense, the general shareholders meeting decides to impose an issue premium of $ 20.
Consequently, we will issue shares worth $ 100, of which $ 80 correspond to the share capital aliquot and the remaining $ 20 will go to the company’s reserves.
In conclusion, a premium share is a share of a company that is issued above its nominal value. Avoiding harming the initial shareholders and accumulating reserves for the company.