Capital Stock Definition
The capital stock is the total amount of share capital (including equity capital and preference capital) that has been issued by a company, and the same can be found in the balance sheet in the column of “shareholder’s equity.” It is a means of raising funds by the company to meet its various business goals.
Capital Stock Types
It can be divided into the following types:
- Authorized = Authorized Capital represents the maximum amount of share capitalShare CapitalShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side.read more that a company can issue, as mentioned in its legal charter. It can be altered by making changes to its legal charter after following prescribed procedures.
- Issued = It means the total amount of share capital that is presently issued by the company out of its authorized capital stock. It is worthy to note that issued capital cannot exceed the authorized capital stock.
- Unissued = It reflects the part of authorized capital stock that the company has not issued yet.
- Outstanding = It means those issued sharesIssued SharesShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner's equity on the Company's balance sheet.read more which are still held by the stockholders (i.e., those shares which are not bought back by the company)
- Treasury Shares =Treasury SharesTreasury SharesTreasury Stock is a stock repurchased by the issuance Company from its current shareholders that remains non-retired. Moreover, it is not considered while calculating the Company’s Earnings Per Share or dividends. read more means those issued shares which are bought back by the company.
Capital Stock Formula
The formula for calculating capital stock in the balance sheet is as follows:
It is calculated by multiplying the number of shares issued with the par value per sharePar Value Per SharePar value of shares is the minimum share value determined by the company issuing such shares to the public. Companies will not sell such shares to the public for less than the decided value.read more.
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Source: Capital Stock (wallstreetmojo.com)
Examples of Capital Stock in the Balance Sheet
Let us understand the method of calculation by way of examples.
Example #1
A company issued 5,000 shares at $6 per share, having a par value of $5 each.
Solution
Calculation of Capital Stock
- = 5,000 * 5
- = $25,000
Example #2
A company has issued equity as well as preference shares as follows-
- 6,000 equity shares issued at par value of $10 each.
- 7,000 preference shares issued at par value of $8 each;
Solution
Calculation of Capital Stock
- = 6,000*10 + 7,000*8
- = $1,16,000
Advantages
The following are the advantages which are listed below:
- The company’s dependence on outside debt is reduced.
- The company is free to use the funds for as long as it needs, while in case it opts for taking outside loans, it will need to repay it after a certain fixed period.
- It shows the trust of the investors in the company and thus increases its credibility.
- Unlike in the case of debt financing, the investors need not be paid fixed income every year. A company can pay dividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more according to its financial condition.
- There is freedom for the company to use the funds as per its goals without any restrictions.
Disadvantages
The following are the disadvantages which are listed below:
- The dividend that the company pays is not a tax-deductible expense.
- The control of the company is diluted when it is issued.
- The company is subjected to various laws and regulations when it issues it and thus is complicated than taking a loan, for instance.
- The approval of stockholders is required to make major decisions in the company. It may be serious trouble in case of disagreement with the stockholders.
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This article has been a guide to Capital Stock and its definition. Here we discuss the formula for calculation capital stock in balance sheet along with practical examples, advantages & disadvantages. You can learn more about financing from the following articles –
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