Long Term Investment in Stock vs. Contributed Capital
Original post by Will Gish of Demand Media
The interconnected worlds of business, finance and economics maintain a language all their own. In this arcane parlance, a number of words and phrases contain similar and overlapping meanings, among them “contributed capital” and the concept of “long-term investment” in stock. Despite any surface similarities, a number of things differentiate these two terms, including their compositional elements, status as coined terms in business lingo and relationships to corporations.
Contributed capital, also known as paid-in capital, represents the money invested in a business by its owners. This can take three forms: common stock, preferred stock and additional paid-in capital. Additional paid-in capital constitutes any money made from stock sales in addition to the face value of a share. For instance, if a share holds a face value of $10 and you buy it for $12, the $2 difference is additional paid-in capital. Long-term investment in stock contains one element, but an abstract one: stocks – any stocks. A long-term investment is defined by the tax code and the term refers to a stock that you own for at least one year.
Contributed capital comes from the business rather than the investor. Accountants working for companies keep track of contributed capital as a part of routine bookkeeping. Long-term investment applies largely to the investor end of the continuum and relates to your habits as an investor. Funds, such as mutual funds and hedge funds, may pay attention to the longevity of your investments, but the companies issuing stock pay no mind to this issue – they keep track of shares and capital earned from shares, not which investors own them. Only in exceptional cases, such as a potential buyout, do companies care about who owns shares and for how long.
“Contributed capital” constitutes an actual business and accounting term. It appears in numerous textbooks, websites and other resources devoted to corporate finance and accounting. Long-term investment in stock is not an actual business or accounting term but rather a concept. The only actual parameter for long-term investment comes from the Internal Revenue Service, which defines long-term versus short-term investments for tax purposes. The reality behind the idea of long-term investment in stock assumes myriad forms, from individual investors growing capital earned from jobs to businesses purchasing controlling interests in other companies through the long-term acquisition of stock.
Relationship to Corporations
Contributed capital and the long-term investment in stocks maintain different relationships with corporations. Every corporation that issues shares maintains contributed capital and the three compositional elements therein. The long-term investment in stock, on the other, is an abstract notion – it pertains to no specific stock and maintains no real, lasting relationships with any type of corporation. Stocks comprise an integral part of any publicly traded corporation’s capital structure, though this holds true regardless of whether any long-term investment takes place or whether all investors buy and sell stock in the short term.
- Accounting Coach; Paid-in Capital and Retained Earnings; Harold Averkamp
- “Financial Accounting for Dummies”; Marie Loughran; 2011
- “Wiley GAAP 2012”; Steven M Bragg; 2011
- Internal Revenue Service: Capital Gains and Losses
- CNN Money: Investing Basics
About the Author
Will Gish slipped into itinerancy and writing in 2005. His work can be found on various websites. He is the primary entertainment writer for "College Gentleman" magazine and contributes content to various other music and film websites. Gish has a Bachelor of Arts in art history from University of Massachusetts, Amherst.
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