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Hello. In your notes it is stated “If shares are issued at a price higher than the nominal value, then the extra is known as share
premium”. Can you please tell me that we compare the nominal price with the market price or issue price and what is the difference between market price and issue price?For example if a share has a nominal price of $0.50 and the market price of $2 and the issue price of $3 then the premium is therefore $1.50 or $2.50?
And if we take that vice versa where share has a nominal value of $0.50 and the market price of $0.40 and issue price of $0.30 then the discount is therefore $0.10 or $0.20?
Also you said in one of your lectures that companies can choose to issue their share on whatever price they want but are you talking about issue price there!?
For example if a company has nominal price of $1 but they can issue a share at whatever price they want which basically means what they think people would willing to pay is sensible?
Please help me here. Thank you
When a company issues new shares, the issue price is the price that they are charging for the new shares. It will either be the same as the nominal value, or might be higher than the nominal value (certainly if the company has already been trading and making profits). The difference between the issue price and the nominal value is the share premium. They only ever issue shares at either the nominal value or a higher value (not at a lower value as in your example).
If the shares are traded on a stock exchange then the price at which shares are bought or sold between shareholders changes from day to day and is the market value. This is of no relevance at all for the financial accounts of the company – it is the price that shareholders pay each other when they trade shares between themselves.
Thanks.
1. Is it true that when a company decides to issue the shares for the first time then they can issue the shares at whatever price they want or think that people would be willing to pay for a share?
2. When a company issue the shares in the market then the money received from each shareholder paying for the share is called share capital which is actually the money received and owed to-or-from the shares?
4. Once a company issued the shares in the market then the shareholders who are willing to buy-and-sell the shares would trade them at a certain price which has nothing to the company and any money received from selling a share and money paid for buying a share would be getting in-or-out of the pockets of the shareholders?
5. The market would earn the difference between the buying price and selling price of the shares. For eg if a share is sold $5 but it the buyer has paid $4 then the house will get the $1 difference, is that right?
6. Is it also true that the difference between issue price and nominal price is the share premium but can you also elaborate what is share discount and why would a company issue a share at discounted price?
1. Yes – they can use at whatever price they want (and obviously will take into account what they think people will be willing to pay).
2. The nominal value is called share capital. If the money received was higher than the nominal value then the extra is called share premium.
4. True (but not relevant for Paper FA).
5. Again, not relevant for Paper FA. Once the company has issued the shares then if one shareholder sells his/her share to someone else, it has no effect on the financial accounts of the company.
6. Not relevant for Paper FA.
Everything relevant for Paper FA is covered in my free lectures. They are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
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