What Is Share Capital?
Share capital is the money a company raises by issuing common or preferred stock. The amount of share capital or equity financing a company has can change over time with additional public offerings.
The term share capital can mean slightly different things depending on the context. Accountants have a much narrower definition, and their definition rules on the balance sheets of public companies. It means the total amount raised by the company in sales of shares.
- A company's share capital is the money it raises from selling common or preferred stock.
- Authorized share capital is the maximum amount a company has been approved to raise in a public offering.
- A company may opt for a new offer of stock in order to increase the share capital on its balance sheet.
Understanding Share Capital
Share capital is reported by a company on its balance sheet in the shareholder's equity section. The information may be listed in separate line items depending on the source of the funds. These usually include a line for common stock, another for preferred stock, and a third for additional paid-in capital.
Common stock and preferred stock shares are reported at their par value at the time of sale. In modern business, the "par" or face value is a nominal figure. The actual amount received by a company in excess of par value is reported as "additional paid-in capital."
On a balance sheet, the proceeds of stock sales are listed at their nominal par value while the "additional paid-in capital" line reflects the real price paid over par for the shares.
The amount of share capital reported by a company includes only payments for purchases made directly from the company. The later sales and purchases of those shares, and the rise or fall of their prices on the open market, have no effect on the company's share capital.
A company may opt to have more than one public offering after its initial public offering (IPO). The proceeds of those later sales would increase the share capital on its balance sheet.
Types of Share Capital
The term "share capital" is often used to mean slightly different things depending on the context. When discussing the amount of money a company can legally raise through the sale of stock, there are several categories of share capital.
Accountants have a much narrower definition.
Authorized Share Capital
Before a company can raise equity capital, it must obtain permission to execute the sale of stock. The company must specify the total amount of equity it wants to raise and the base value of its shares, called the par value.
The maximum amount of share capital a company is allowed to raise is called its authorized capital.
This does not limit the number of shares a company may issue but it puts a ceiling on the total amount of money that can be raised by the sale of those shares. 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.
Issued Share Capital
The total value of the shares a company elects to sell to investors is called its issued share capital. The par value of the issued share capital cannot exceed the value of the authorized share capital.
Share Capital on a Balance Sheet
The technical accounting definition of share capital is the par value of all equity securities, including common and preferred stock, sold to shareholders.
However, people who are not accountants often include the price of the stock in excess of par value in the calculation of share capital. As noted, the par value of stock is nominal, typically $1 or less. So, the difference between the par value and the real sale price, called paid-in capital, is usually considerable. Nevertheless, it is not technically included in share capital or capped by authorized capital limits.
Here's an example, and how it appears on a balance sheet: Assume company ABC issues 1,000 shares. Each share has a par value of $1 and sells for $25. The company's accountant will record $1,000 as share capital and the remaining $24,000 as additional paid-in capital.