What is share capital? Types and definition

  Broadly,  as the term share capital may be viewed or narrowly by pubic firms accountants, it is seen as the total amount, including those held in tangible non-tangible assets, raised by a company in share sales; and is reflected on the balance sheets in the area of its shareholder’s equity declaration. However,  depending on the source of the funds the information may be listed in separate line items, and usually include a line for preferred stock, additional paid-in capital and common stock both of which are at the same time of sale reported at their par value.

   Quick term definition: By Par or face Value, we mean the nominal figure or price of a share/stock.

• Additional paid in capital: this is the actual amount of share purchase received by firm in excess of par value.

•  Preferred stock and common stock, reported at their par value at the time of sale, are a firm’s major share capital source.

   Shareholders by liability, relevance and priority:

1.  Preferred shareholders: this type of shareholders have more relevance to the firm as they may exercise voting rights, lay claims on  income and assets of the firm and are prioritize over other forms of shareholders within the firm, and are they are paid dividends before common shareholders.

2. Common stock: common stock holders have dividend Right, receive remaining assets in the event of a liquidation and are more exposed to losing their investments in the face of bankruptcy or inflation due to market volatility and stock price fluctuations.

•  A company only report payments of their share capital made directly from the company. Subsequent sales and purchases of the same shares, their rise and fall in prices on the public/open market, will have no impact the share capital of the firm.

Most firms, or usually some, after their initial public offering, may choose to have more than one public offering.The realized/ realizable proceeds of those later sales increases the share capital, and is reflected on its balance sheet.

Types of Share Capital:

1. Issued Share Capital:
The par value of this type of share capital cannot exceed the value of a company’s authorized capital, and is defined as the total value of shares the company offers to sell to her willing investors.

This accounting information on the balance sheet is entered as the par value of all equity securities, preferred stock and common stock, sold to company’s shareholders..

2. Authorized Share Capital:

To execute the sale of stock and raise equity capital, a firm must obtain some relevant permission. This involves the base value of its shares and specification of the total amount of equity it needs to raise.

Simply explained,  authorized share capital is the maximum amount of share capital the firm is allowed to raise by authorities involved in the regulation of public security control and management, which varies across countries of the world.

However, this condition does not limit the company to  the number of shares it may issue but puts a cap on the total amount that can be raised through the sale of its shares. 

*The relationship between Equity and share capital:

Share capital is part of a company’s equity raised from its issuing/ sale of preferred shares and common shares as opposed to its other types of equity accounts.

• In the calculation of share capital, the stock price should never be included in excess of par value. The difference between par value, nominal figure, and the real stock sale price, known as the paid-in capital capital, is usually sizeable; and it’s not ceilinged by authorized capital limit or included in the share capital.

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Disclaimer:

The knowledge provided here is solely for educational and research learning; and does not in anyway serve as professional financial advice, nor is it qualified for investment decision making. If you want any help with such subjects, don’t hesitate to consult relevant authorities within your local.