Capital Stock

Loading the player...

What is a 'Capital Stock'

Capital stock is the common and preferred stock a company is authorized to issue according to the corporate charter. Accountants define capital stock as one component of the equity section in a company's balance sheet. Firms can issue more capital stock over time or buy back shares that are currently owned by shareholders.

BREAKING DOWN 'Capital Stock'

Capital is defined as the total dollars a company receives to operate the business. Capital can be obtained by issuing stock (equity) or debt securities. Companies with consistent corporate profits raise more firm capital by issuing debt, because the firm can generate income to make interest payments. On the other hand, businesses with less consistent earnings raise funds by issuing equity. Investment firms perform financial statement analysis to determine if a company should issue stock, debt or a combination of both types of securities.

Factoring in the Corporation Charter

A corporate charter is the legal document used to start a corporation. The charter includes the total amount of authorized shares of stock. Authorized stock refers to the maximum amount of shares that the firm can issue during the corporation's existence; those shares can be either common or preferred stock shares. A business can issue shares over time, as long as the total number of shares does not exceed the authorized amount.

The Differences Between Common and Preferred Stock

Preferred stock dividends are typically a stated dollar amount. These dividends are paid before common stock dividends. In some cases, the preferred dividends accumulate and must be paid later, if company earnings are not sufficient to pay the preferred dividend in the current year. In the event of company liquidation, preferred shareholders have a claim on any remaining company assets that takes priority over common stock owners.

How Stock is Presented in the Balance Sheet

The equity section of the balance sheet is composed of three account balances: including common stock, additional paid-in capital and retained earnings. The common stock balance is calculated as the par value of the common stock multiplied by the number of common stock shares outstanding. Par value is a fixed dollar amount assigned to each common share and the amount paid by investors above the par value is posted to additional paid in capital. If, for example, the par value of the stock is $10 per share and shares are issued to the public for $30, the additional paid in capital is increased by $20 per share.

Preferred stock shares are also posted to the equity section of the balance sheet, and the preferred shares have a different dollar amount of par value.

RELATED TERMS
  1. Preferred Stock

    A class of ownership in a corporation that has a higher claim ...
  2. Paid In Capital

    The amount of capital "paid in" by investors during common or ...
  3. Authorized Stock

    The maximum number of shares that a corporation is legally permitted ...
  4. Half Stock

    Stock sold with a par value half of what is considered standard. ...
  5. Preference Shares

    Company stock with dividends that are paid to shareholders before ...
  6. Contributed Capital

    An entry on the shareholders' equity section of a company's balance ...
Related Articles
  1. Markets

    What is Capital Stock?

    Capital stock refers to the number of authorized shares a corporation may issue, both common and preferred.
  2. Investing

    What's Share Capital?

    Share capital, also called equity financing, is the total amount of money and property a company has received for selling its shares to shareholders.
  3. Investing

    What are Issued Shares?

    Issued shares are the amount of authorized stocks a company’s shareholders buy and own. The annual report shows the number of outstanding shares.
  4. Investing

    Paid-Up Capital

    Paid-Up Capital is listed in the equity section of the balance sheet. It represents the amount of money shareholders have paid into the company by purchasing shares. It’s essentially two accounts, ...
  5. Investing

    Advising FAs: How To Explaining Stocks to a Client

    Without a doubt, common stocks are one of the greatest tools ever invented for building wealth.
  6. Investing

    How Dividends Affect Stockholders' Equity

    Find out how dividends affect a company's stockholders' equity and how the accounting process changes based on the type of dividend issued.
  7. Trading

    Preferred Stocks versus Bonds: How to Choose

    What is the difference between corporate bonds and preferred stock? The following are a list of pros and cons for each investment.
  8. Investing

    The Advantages of Preferred Dividends

    Preferred dividends are cash distributions a company pays on its preferred shares.
  9. Investing

    Additional Paid-In Capital

    Additional paid-in capital is an account in the equity section of a balance sheet. It represents the additional amount paid for the company’s shares over the par value of the shares. Additional ...
  10. Investing

    What is Convertible Preferred Stock?

    Convertible preferred stock is preferred stock that can be converted into common stock as of a predetermined date at a specified ratio.
RELATED FAQS
  1. How do companies report the value of their capital stock?

    Find out how companies report the value of their capital stock in their financial statements, including why some companies ... Read Answer >>
  2. What's the difference between a capital stock and a treasury stock?

    Learn about treasury capital stock, how to calculate a company's capital and treasury stock, and the differences between ... Read Answer >>
  3. What are the types of share capital?

    Understand the characteristics of common stock and preferred stock, the two ways by which companies obtain share capital ... Read Answer >>
  4. What is common stock and preferred stock?

    Learn about the differences between common and preferred shares. Explore situations where preferred shares have more favorable ... Read Answer >>
  5. What is the difference between the equity market and the stock market?

    Discover the basic information about the equity, or stock, market and the two primary classifications of equities that are ... Read Answer >>
  6. Why is an increase in capital stock on a company's balance sheet a bad sign for stockholders?

    Understand what capital stock represents for a company and understand the significance for investors when a company initiates ... Read Answer >>
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center