What is share capital? | IIFL Knowledge Center
The term “capital” is used in a variety of fields including corporate finance, capital budgeting, investing, and economics. Capital basically means wealth in the form of money or assets held by an individual or organization to start a business or invest. It is also a type of stocks in which you can invest. To learn more about share capital, read on.
What is share capital?
Share capital refers to the ownership of a business. It is also another term to designate the shareholding of a company. The definition of share capital is the amount of stock and preferred stock that a company is authorized to issue in accordance with the articles of association. The amount of share capital is mentioned in a company’s balance sheet under the heading Equity. It goes without saying that share capital can only be issued by a company.
Share capital includes the maximum number of shares that may be outstanding at any time. However, this is not the same as the number of outstanding shares of the company. Share capital is also known as the authorized share capital of a company which is legally issued to the public. On the other hand, outstanding shares refer to the shares that have been issued and remain outstanding. Thus, the outstanding shares constitute a subset of the authorized share capital.
How are equity allocated?
A company’s board of directors approves the maximum number of shares that can be issued. The stock can be either stock or preferred stock. The company may issue shares over time subject to the authorized share capital. Allowing multiple shares incurs significant legal costs. Thus, authorizing a large number of issuable shares over time is cost effective.
Share capital also includes preferred shares. However, preferred shareholders receive dividends before stockholders. Sometimes the dividend rate for preferred stock is predetermined. In addition, preferred shareholders have priority over shareholders at the time of liquidation. Preferred shares can lose value if inflation rises since the dividend paid to preferred stockholders is fixed while the dividend paid to stockholders depends on the financial performance of the company.
Share capital and trading
It should be noted that stock or share transactions have no impact on the company’s share capital. In addition, each company maintains a register which includes the names of the current shareholders of the company along with their correspondence details. The register of shareholders is updated each time the ownership of the company changes.
How to calculate the value of share capital?
Share capital is valued on the basis of its nominal value and its market value. Par value or par value is a nominal amount arbitrarily assigned from a financial reporting perspective at the time of issuance of shares. The face value is usually in multiples of Rs. 10. The face value of a share bears no relation to the market price. Market price refers to the price at which the shares are currently trading in the market. Let’s take an example to understand the valuation of social capital.
Suppose ABCD Limited is authorized to issue 1 Lakh Equity Shares with a nominal value of Rs. 10 each and 0.50 Lakh Preference Shares with a nominal value of Rs. 5 each. The number of shares and preferred shares outstanding are 0.75 Lakh and 0.10 Lakh respectively. The market value of shares and preferred shares is Rs. 550 and Rs. 300 respectively.
Hence, the value of share capital is Rs. 12.5 Lakhs being Rs. 10 Lakhs of equity shares and Rs. 2.5 Lakhs of preferred shares.
The par value of the outstanding shares is Rs. 8 Lakhs consisting of Rs. 7.5 Lakhs equity shares and Rs. 0.5 Lakhs preferred shares.
The market value of the outstanding shares is Rs. 442.5 Lakhs consisting of Rs. 412.5 Lakhs of equity shares and Rs. 30 Lakhs of preferred shares.
Benefits of share capital
The main purpose of share capital is to raise capital for the business without incurring debt. Thus, share capital does not increase the fixed cost of the business. It is generally used to raise capital and expand the business. A company can also issue shares instead of buying assets such as land, plant and machinery, equipment, etc. Investors buy shares of a company not only for capital appreciation, but also for the payment of dividends.
On the other hand, issuing capital stock dilutes the value of the company’s outstanding shares and may result in giving up control or management of the company.
Investing in equity is only a great investment option if you have done the proper research and determined that it is the right financial path for you. If you need help, you can consult the IIFL experts. Additionally, you would need a trading account to buy and sell your share capital, which can be done through IIFL’s intuitive online platform in just a few simple steps.