Definition of social capital
What is share capital?
Share capital is the number of common and preferred shares that a company is authorized to issue, in accordance with its corporate charter. The share capital can only be issued by the company and corresponds to the maximum number of shares that may be in circulation. The amount is entered in the balance sheet under the company’s equity section.
Key points to remember
- Share capital is the number of common and preferred shares that a company is authorized to issue — recorded on the balance sheet as equity.
- The amount of share capital is the maximum amount of shares that a company can have in circulation.
- The issuance of share capital allows a company to raise funds without going into debt.
- The downsides to issuing share capital are that the company gives up more control and dilutes the value of the outstanding shares.
Understanding social capital
Share capital can be issued by a company to raise capital in order to develop its business. The issued shares can be bought by investors – who are looking for price appreciation and dividends – or exchanged for assets, such as equipment needed for operations.
The number of shares outstanding, which are shares issued to investors, is not necessarily equal to the number of shares available or authorized. Permitted shares are those that a company is legally able to issue – share capital, while outstanding shares are those that have actually been issued and remain outstanding to shareholders.
Issuing share capital can enable a business to raise funds without incurring the burden of debt and associated interest charges. The downsides are that the company would give up more of its equity and dilute the value of each outstanding share.
The amount that a company receives from the issuance of share capital is considered a capital contribution from investors and is reported as paid-in capital and additional paid-up capital in the equity section of the balance sheet.
The balance of ordinary shares is calculated as the par or par value of ordinary shares multiplied by the number of ordinary shares outstanding. The face value of a company’s shares is an arbitrary value assigned for balance sheet purposes when the company issues stock and is typically $ 1 or less. It has no relation to the market price.
Example of share capital
If a company obtains approval to raise $ 5 million and its shares have a par value of $ 1, it can issue and sell up to 5 million shares. The difference between the nominal value and the sale price of the share is recorded in equity as an issue premium.
If the stock sells for $ 10, $ 5 million will be recorded as paid-up capital, while $ 45 million will be treated as additional paid-up capital.
Take the example of Apple (AAPL), which authorized 12.6 million shares with a par value of $ 0.00001. The 12.6 million constitute its share capital. Meanwhile, as of June 27, 2020, Apple had issued 4,283,939 shares and had 4,443,236 outstanding.
Companies can issue part of the share capital over time or buy back shares that currently belong to shareholders. Previously outstanding shares which are repurchased by the company are called treasury shares.
Authorized shares refer to the maximum number of shares that a company is authorized to issue based on the approval of the board of directors. These shares can be ordinary or preferred shares. A company can issue shares over time, as long as the total number of shares does not exceed the authorized amount. Authorizing a number of shares is an exercise that entails legal costs, and authorizing a large number of shares that can be issued over time is a way to optimize this cost.
Preferred stocks are listed first in the equity section of the balance sheet because their owners receive dividends before owners of common stock and have preference on liquidation. Its face value is different from that of the common stock and sometimes represents the initial sale price per share, which is used to calculate its dividend payments.
The total par value is equal to the number of preferred shares outstanding multiplied by the par value per share. For example, if a company has 1 million preferred shares with a par value of $ 25 per share, it reports a par value of $ 25 million.