Loading the player...

What is a 'Capital Stock'

Capital stock is the number of common and preferred shares that a company is authorized to issue, according to its corporate charter. The amount received by the corporation when it issued shares of its capital stock is reported in the shareholders' equity section of the 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 stock is the maximum number of shares that can ever be outstanding, and is therefore not necessarily equal to the number of outstanding shares. If a company changes this number, by amending its charter, it may be a sign that it plans to raise capital by issuing more stock.

How Capital Stock is Recorded in the Balance Sheet

The shareholders’ equity section of the balance sheet is composed of three account balances: common stock, additional paid-in capital and retained earnings.

The common stock balance is calculated as the nominal or par value of the common stock multiplied by the number of common stock shares outstanding. The nominal value of a company's stock is an arbitrary value assigned for balance sheet purposes when the company is issuing share capital – and is typically $1 or less. It has no relation to market price.

For example, if a company obtains authorization to raise $5 million and its stock has a par value of $1, it may issue and sell up to 5 million shares of stock. The difference between the par and the sale price of stock, called the share premium, may be considerable, but it is not technically included in share capital or capped by authorized capital limits. So, if the stock sells for $10, $5 million will be recorded as equity capital, while $45 million will be treated as additional paid in capital.

Preferred stock is listed first in the shareholders' equity section of the balance sheet, because its owners receive dividends before the owners of common stock, and have preference during liquidation. Its par value is different from the common stock, and sometimes represents the initial selling price per share, which is used to calculate its dividend payments. Total par value equals the number of preferred stock shares outstanding times the par value per share. For example, if a company has 1 million shares of preferred stock at $25 par value per share, it reports a par value of $25 million.

The Corporate Charter

A corporate charter is the legal document used to start a corporation. The charter includes the total number of authorized shares of stock. Authorized stock refers to the maximum number of shares that a firm can issue during its 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.

RELATED TERMS
  1. Shares

    Shares are a unit of ownership of a company that may be purchased ...
  2. Capital

    Capital is a term for financial assets or their financial value, ...
  3. Preferred Stock

    Preferred stock refers to a class of ownership that has a higher ...
  4. Issued Shares

    Issued shares are the number of authorized shares sold to and ...
  5. New Issue

    A new issue references a security that has been registered, issued, ...
  6. Preference Shares

    Preference shares are company stock with dividends that are paid ...
Related Articles
  1. Managing Wealth

    Issued share capital versus subscribed share capital

    Learn the difference between issued share capital versus subscribed share capital. Get information about various types of capital.
  2. Investing

    Balance Sheet: Analyzing Owners' Equity

    Analyzing owners’ equity is an important analytics tool, but it should be done in the context of other tools such as analyzing the assets and liabilities on the balance sheet.
  3. Investing

    Dividend facts you may not know

    Dividends are one way in which companies "share the wealth" generated from running the business. Discover the issues that complicate these payouts for investors.
  4. Managing Wealth

    An Example of Dividends in Arrears

    Learn about the concept of dividends in arrears and which shares of stock guarantee payment of accrued dividends even if the company doesn't turn a profit.
  5. Financial Advisor

    Analyzing Owners' Equity

    Analyzing owners’ equity is an important exercise for any shareholder.
  6. Investing

    Realty Income Falls on Preferred Stock Purchase

    Realty Income is retiring its preferred stock while issuing more common stock, indicating a belief that shares may still be overpriced.
  7. Investing

    The Basics Of Outstanding Shares And The Float

    We go over different types of shares and what investors need to know about them.
  8. Investing

    Prefer Dividends? Why Not Look At Preferred Stock?

    Preferred stock is an under-used option for income-seeking investors.
  9. Investing

    Investing in Preferred Stock:The Basics

    Preferred stocks provide income as well as the potential to appreciate in value.
RELATED FAQS
  1. Par Value Stock vs No Par Value Stock

    Understand the difference between par and no par value stock and how this differentiation affects corporate liabilities and ... Read Answer >>
  2. Why would a stock have no par value?

    Corporations sometimes issue shares with no par value because it helps them avoid a liability should the stock price take ... Read Answer >>
  3. 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 >>
  4. What is the difference between preferred stock and common stock?

    Preferred stockholders have a greater claim to a company's assets and earnings than common stockholders, but may not have ... Read Answer >>
Trading Center