Share Capital
October 2, 2020
What is Share Capital?
Share Capital is the money a company raises from issuing preferred or common stock shares. A company’s share capital or equity financing can change over time. When a company wishes to raise more equity, it can obtain authorization to issue new shares to existing or new shareholders. This results in an increase in share capital.
The authorized share capital is the biggest amount that a company can raise in a public offering without going back to shareholders to ask. Some companies redeem or repurchase their shares, which reduces the share capital. However, usually, the shares are not cancelled but held by the company’s treasury department, hence the term treasury stock. An important point to note is that the value does not include price changes of share sold in a secondary market after a company has issued them. The rise and fall of those shares on an open market does not affect the company’s share capital.
Reporting Share Capital
A company reports share capital on its balance sheet under the shareholders’ equity section. And in most cases, companies have a line item for common stock, preferred stock and additional paid-in capital.
At the time of sale, companies report common and preferred stock shares at par value. The additional paid-in capital reported is the amount a company receives in excess of par value.
Example
A company sells 100 shares at $10 with a par value of $1:
| Balance Sheet Items |
$ |
| Cash Increase (100 x $1) |
1,000.0 |
| Common Stock Increase (100 x $1.00) |
100.0 |
| Additional Paid-In Capital Increase (($10 -$1) x 100) |
900.0 |
Types
Authorized Share Capital
To raise equity by issuing shares, a company needs the authorization to sell stocks. A company will stipulate the amount of equity it plans to raise and the par value of the shares. The monetary share capital that a company is allowed to raise is called authorized share capital without getting shareholders to vote on an increase. It limits the amount of money a company can raise through the sale of shares, not the number of shares.
Issued Share Capital
Issued share capital is the total value of shares that are physically in existence. Outstanding shares plus treasury shares equal issued shares. The number of issued shares cannot be greater than the number of authorized shares.
Subscribed Share Capital
A company treats shares that investors have promised to buy as subscribed share capital, which is subscribed during an initial public offering (IPO). In many instances, underwriters make a certain number of subscribed shares available before the IPO. Most of those subscribers will be large institutional investors and banks.
Unissued Share Capital
Although companies are allowed to issue the total authorized share capital, they may not do so all at once. The portion that a company does not offer for sale is referred to as unissued. To calculate the number of unissued shares, deduct the total amount of shares outstanding and the treasury stock shares (which are the shares a company repurchased) from the authorized number of shares.