What Is Additional Paid-in Capital (APIC)?

Additional paid-in capital (APIC) is an accounting term referring to money an investor pays above and beyond the par value price of a stock.

Often referred to as “contributed capital in excess of par,” APIC occurs when an investor buys newly-issued shares directly from a company during its initial public offering (IPO) stage. APIC, which is itemized under the shareholder equity (SE) section of a balance sheet, is viewed as a profit opportunity for companies as it results in them receiving excess cash from stockholders.

How Additional Paid-in Capital (APIC) Works

During its IPO, a firm is entitled to set any price for its stock that it sees fit. Meanwhile, investors may elect to pay any amount above this declared par value of a share price, which generates the APIC.

Let us assume that during its IPO phase the XYZ Widget Company issues one million shares of stock, with a par value of $1 per share, and that investors bid on shares for $2, $4, and $10 above the par value. Let us further assume that those shares ultimately sell for $11, consequently making the company $11 million. In this instance, the APIC is $10 million ($11 million minus the par value of $1 million). Therefore, the company’s balance sheet itemizes $1 million as “paid-in capital,” and $10 million as “additional paid-in capital.”

Once a stock trades in the secondary market, an investor may pay whatever the market will bear. When investors buy shares directly from a given company, that corporation receives and retains the funds as paid-in capital. But after that time, when investors buy shares in the open market, the generated funds go directly into the pockets of the investors selling off their positions.

Special Considerations

APIC is generally booked in the SE section of the balance sheet. When a company issues stock, there are two entries that take place in the equity section: common stock and APIC. The total cash generated by the IPO is recorded as a debit in the equity section, and the common stock and APIC are recorded as credits.

The APIC formula is:

APIC = (Issue Price – Par Value) x Number of Shares Acquired by Investors.

Par Value

Due to the fact that APIC represents money paid to the company above the par value of a security, it is essential to understand what par actually means. Simply put, “par” signifies the value a company assigns to stock at the time of its IPO, before there is even a market for the security. Issuers traditionally set stock par values deliberately low—in some cases as little as a penny per share—in order to preemptively avoid any potential legal liability, which might occur if the stock dips below its par value.

Market Value

Market value is the actual price a financial instrument is worth at any given time. The stock market determines the real value of a stock, which shifts continuously as shares are bought and sold throughout the trading day. Thus, investors make money on the changing value of a stock over time, based on company performance and investor sentiment.

Additional Paid-in Capital vs. Paid-in Capital

Paid-in capital, or contributed capital, is the full amount of cash or other assets that shareholders have given a company in exchange for stock. Paid-in capital includes the par value of both common and preferred stock plus any amount paid in excess.

Additional paid-in capital, as the name implies, includes only the amount paid in excess of the par value of stock issued during a company’s IPO.

Both of these items are included next to one another in the SE section of the balance sheet.

Benefits of Additional Paid-in Capital

For common stock, paid-in capital consists of a stock’s par value and APIC, the latter of which may provide a substantial portion of a company’s equity capital, before retained earnings begin to accumulate. This capital provides a layer of defense against potential losses, in the event that retained earnings begin to show a deficit. 

Another huge advantage for a company issuing shares is that it does not raise the fixed cost of the company. The company doesn’t have to make any payment to the investor; even dividends are not required. Furthermore, investors do not have any claim on the company’s existing assets.

After issuing stock to shareholders, the company is free to use the funds generated any way it chooses, whether that means paying off loans, purchasing an asset, or any other action that may benefit the company.

Correction—March 29, 2022: A previous version of this article inaccurately represented where APIC appears on the balance sheet.

What Is Appreciation?

Appreciation, in general terms, is an increase in the value of an asset over time. The increase can occur for a number of reasons, including increased demand or weakening supply, or as a result of changes in inflation or interest rates. This is the opposite of depreciation, which is a decrease in value over time.

How Appreciation Works

Appreciation can be used to refer to an increase in any type of asset, such as a stock, bond, currency, or real estate. For example, the term capital appreciation refers to an increase in the value of financial assets such as stocks, which can occur for reasons such as improved financial performance of the company.

Just because the value of an asset appreciates does not necessarily mean its owner realizes the increase. If the owner revalues the asset at its higher price on their financial statements, this represents a realization of the increase.

Another type of appreciation is currency appreciation. The value of a country’s currency can appreciate or depreciate over time in relation to other currencies.

How to Calculate the Appreciation Rate

The appreciation rate is virtually the same as the compound annual growth rate (CAGR). Thus, you take the ending value, divide by the beginning value, then take that result to 1 dividend by the number of holding periods (e.g. years). Finally, you subtract one from the result. 

 However, in order to calculate the appreciation rate that means you need to know the initial value of the investment and the future value. You also need to know how long the asset will appreciate.

For example, Rachel buys a home for $100,000 in 2016. In 2021, the value has increased to $125,000. The home has appreciated by 25% [($125,000 – $100,000) / $100,000] during these five years. The appreciate rate (or CAGR) is 4.6% [($125,000 / $100,000)^(1/5) – 1].

Appreciation vs. Depreciation

Appreciation is also used in accounting when referring to an upward adjustment of the value of an asset held on a company’s accounting books. The most common adjustment on the value of an asset in accounting is usually a downward one, known as depreciation.

Certain assets are given to appreciation, while other assets tend to depreciate over time. As a general rule, assets that have a finite useful life depreciate rather than appreciate.

Depreciation is typically done as the asset loses economic value through use, such as a piece of machinery being used over its useful life. While appreciation of assets in accounting is less frequent, assets such as trademarks may see an upward value revision due to increased brand recognition.

Real estate, stocks, and precious metals represent assets purchased with the expectation that they will be worth more in the future than at the time of purchase. By contrast, automobiles, computers, and physical equipment gradually decline in value as they progress through their useful lives.

Example of Capital Appreciation

An investor purchases a stock for $10 and the stock pays an annual dividend of $1, equating to a dividend yield of 10%. A year later, the stock is trading at $15 per share and the investor has received the dividend of $1.

The investor has a return of $5 from capital appreciation as the price of the stock went from the purchase price or cost basis of $10 to a current market value of $15. In percentage terms, the stock price increase led to a return from capital appreciation of 50%. The dividend income return is $1, equating to a return of 10% in line with the original dividend yield. The return from capital appreciation combined with the return from the dividend leads to a total return on the stock of $6 or 60%.

Example of Currency Appreciation

China’s ascension onto the world stage as a major economic power has corresponded with price swings in the exchange rate for its currency, the yuan. Beginning in 1981, the currency rose steadily against the dollar until 1996, when it plateaued at a value of $1 equaling 8.28 yuan until 2005. The dollar remained relatively strong during this period. It meant cheaper manufacturing costs and labor for American companies, who migrated to the country in droves.

It also meant that American goods were competitive on the world stage as well as the U.S. due to their cheap labor and manufacturing costs. In 2005, however, China’s yuan reversed course and appreciated 33% in value against the dollar. As of May 2021, it’s still near that retraced level, trading at 6.4 yuan.

Appreciation FAQs

What Is an Appreciating Asset?

An appreciating asset is any asset which value is increasing. For example, appreciating assets can be real estate, stocks, bonds, and currency.

What Is Appreciation Rate?

Appreciation rate is another word for growth rate. The appreciation rate is the rate at which an asset’s value grows.

What Is a Good Home Appreciation Rate?

A good appreciation rate is relative to the asset and risk involved. What might be a good appreciation rate for real estate is different than what is a good appreciation rate for a certain currency given the risk involved.

What Is Meant by Capital Appreciation?

Capital appreciation is the increase in the value or price of an asset. This can include stocks, real estate, or the like.  

The Bottom Line

Appreciation is the rise in the value of an asset, such as currency or real estate. It’s the opposite of depreciation, which reduces the value of an asset over its useful life. Increases in value can be attributed to interest rate changes, supply and demand changes, or various other reasons. 

What Is the Average Annual Return (AAR)?

The average annual return (AAR) is a percentage used when reporting the historical return, such as the three-, five-, and 10-year average returns of a mutual fund. The average annual return is stated net of a fund’s operating expense ratio. Additionally, it does not include sales charges, if applicable, or portfolio transaction brokerage commissions.

In its simplest terms, the average annual return (AAR) measures the money made or lost by a mutual fund over a given period. Investors considering a mutual fund investment will often review the AAR and compare it with other similar mutual funds as part of their mutual fund investment strategy.

Understanding the Average Annual Return (AAR)

When you are selecting a mutual fund, the average annual return is a helpful guide for measuring a fund’s long-term performance. However, investors should also look at a fund’s yearly performance to fully appreciate the consistency of its annual total returns.

For example, a five-year average annual return of 10% looks attractive. However, if the yearly returns (those that produced the average annual return) were +40%, +30%, -10%, +5% and -15% (50 / 5 = 10%), performance over the past three years warrants examination of the fund’s management and investment strategy.

Components of an Average Annual Return (AAR)

There are three components that contribute to the average annual return (AAR) of an equity mutual fund: share price appreciation, capital gains, and dividends.

Share Price Appreciation

Share price appreciation results from unrealized gains or losses in the underlying stocks held in a portfolio. As the share price of a stock fluctuates over a year, it proportionately contributes to or detracts from the AAR of the fund that maintains a holding in the issue.

For example, the American Funds AMCAP Fund’s top holding is Netflix (NFLX), which represents 3.7% of the portfolio’s net assets as of Feb. 29, 2020. Netflix is one of 199 equities in the AMCAP fund. Fund managers can add or subtract assets from the fund or change the proportions of each holding as needed to meet the fund’s performance objectives. The fund’s combined assets have contributed to the portfolio’s 10-year AAR of 11.58% through Feb. 29, 2020.

Capital Gains Distributions

Capital gains distributions paid from a mutual fund result from the generation of income or sale of stocks from which a manager realizes a profit in a growth portfolio. Shareholders can opt to receive the distributions in cash or reinvest them in the fund. Capital gains are the realized portion of AAR. The distribution, which reduces share price by the dollar amount paid out, represents a taxable gain for shareholders.

A fund can have a negative AAR and still make taxable distributions. The Wells Fargo Discovery Fund paid a capital gain of $2.59 on Dec. 11, 2015, despite the fund having an AAR of negative 1.48%.

Dividends

Quarterly dividends paid from company earnings contribute to a mutual fund’s AAR and also reduce the value of a portfolio’s net asset value (NAV). Like capital gains, dividend income received from the portfolio can be reinvested or taken in cash.

Large-cap stock funds with positive earnings typically pay dividends to individual and institutional shareholders. These quarterly distributions comprise the dividend yield component of a mutual fund’s AAR. The T. Rowe Price Dividend Growth Fund has a trailing 12-month yield of 1.36%, a contributing factor to the fund’s three-year AAR of 15.65% through Feb. 29, 2020.

Special Considerations

Calculating an average annual return is much simpler than the average annual rate of return, which uses a geometric average instead of a regular mean. The formula is: [(1+r₁) x (1+r₂) x (1+r₃) x … x (1+r_i)] ^(1/n) – 1, where r is the annual rate of return and n is the number of years in the period.

The average annual return is sometimes considered less useful for giving a picture of the performance of a fund because returns compound rather than combine. Investors must pay attention when looking at mutual funds to compare the same types of returns for each fund.