A type of reserve that is created when an entity issues its shares for the first time to the public at a value exceeding its face value, not when the investors resell them in the open market. For example, if an entity issues its shares at a face value of $5 per share at the price of $8 per share, then the share premium reserve is $3 per share

Share premium, with respect to share capital, it is the amount of money that a company receives for its issued shares over and above the shares’ nominal value. In other words, it represents the difference between the nominal value (face value) and the market value of the shares. Share premium arises when a company issues and sells shares for more than the nominal value. In which case, the shares are said to be have been issued at a premium– i.e., more than market value.

For example, if a company issues one million shares (with a par of USD 1 per share) at USD 2 per share, then in its accounting books, it will record an increase in the issued shares of USD 1 million and an increase in the share premium reserve of USD 1 million (i.e. the USD 2 million received less the par value of the shares issued, USD 1 million).

On the issuer’s balance sheet, the premium account appears as a share premium reserve account, recording the difference between the nominal value of the shares issued and the fair value of the consideration received.