Meaning Of Share Capital
Share capital Transfer to the total value of shares issued by a company and held by its shareholders. It represents the ownership stake of individuals or entities in the company. When a company is formed, it typically divides its ownership into shares, which are then sold or allocated to investors.
Share capital serves as a means of raising funds for the company’s operations, expansion, or investments. It also determines the rights and entitlements of shareholders, such as voting rights and dividends. The value of share capital is calculated by multiplying the number of shares issued by their nominal or par value.
What is Share Capital?
It can be described as the amount of money a company raises by issuing preferred stocks or equity stocks to the public. Regardless, it must be noted that the relevant meaning of share capital depends entirely on the context.
For instance, for an accountant, share capital would simply translate to an amount of money raised through the sale of company shares. It must be remembered that the size of the share capital of a company tends to change with more public offerings.
How share Capital Works ?
Share capital refers to the funds raised by a company through the issuance of shares. When a company decides to raise capital, it offers shares to investors in exchange for their investment. Each share represents a portion of ownership in the company. Shareholders, also known as equity holders, have certain rights such as voting in company matters and receiving dividends.
The company can issue different types of shares with varying characteristics, such as preference shares or ordinary shares. Share capital provides the company with the necessary funds for operations, expansion, and investment.
The value of shares can fluctuate based on market conditions, and shareholders may sell their shares to other investors. The company’s financial health and profitability can impact the value of the shares and the return on investment for shareholders.
Types of Share Capital
Share capital is responsible for keeping the business operation and functioning smooth and running. Its indispensable role in the structure of a limited company and the enhancement of market reputation makes it vital for owners.
1.Authorized share capital
Authorized share capital refers to the maximum number of shares that a company is legally allowed to issue to shareholders. It represents the upper limit of the company’s share issuance. The authorized share capital is defined in the company’s constitutional documents, such as the memorandum of association. It provides a framework for the company to raise funds and allocate ownership.
The authorized share capital can be increased or decreased by following the appropriate legal procedures, but the company cannot issue shares beyond the authorized limit without obtaining approval from relevant authorities.
2.Issued share capital
Issued share capital refers to the total value of shares that a company has officially issued and allotted to shareholders. It represents the portion of authorized share capital that has been sold and is held by investors. The issued share capital includes both equity and preference shares, and it reflects the ownership interest in the company.
This figure is important for determining the company’s market value, calculating earnings per share, and understanding the ownership structure. It is disclosed in the company’s financial statements and is subject to change as the company issues or repurchases shares.
3.Unissued share capital
Unissued share capital refers to the portion of authorized share capital that a company has not yet allocated or issued to shareholders. It represents the authorized shares that the company has the potential to offer to investors but has not yet done so.
Unissued share capital can be used by a company for various purposes, such as raising additional funds, issuing employee stock options, or carrying out future expansion plans. The company’s board of directors holds the authority to determine when and how to issue the unissued share capital in accordance with the company’s objectives and legal requirements.
Subscribed capital refers to the total value of shares that individuals or entities have agreed to acquire from a company. It represents the maximum amount of capital that a company can raise through the issuance of shares based on the commitments made by shareholders.
Subscribed capital signifies the initial level of financial support pledged by shareholders and indicates their intention to invest in the company. It is an important metric for determining the potential funding available to the company and plays a crucial role in assessing its financial strength and capacity for growth.
Paid-up capital refers to the portion of a company’s authorized share capital that has been issued and fully paid by shareholders. It represents the actual amount of capital contributed by shareholders to the company. Paid-up capital is an important measure of the company’s financial strength and represents the funds available for investment and business operations.
It is calculated by multiplying the number of issued shares by their face value or the price at which they were issued. Paid-up capital provides a foundation for the company’s activities and supports its growth and sustainability.
Called-up capital refers to the portion of a company’s share capital that shareholders are required to pay for the shares they have subscribed to. It represents the amount of capital that has been demanded by the company from shareholders and is legally required to be paid. This amount may be paid in full or in installments as specified by the company.
Once the called-up capital is paid by the shareholders, it becomes part of the company’s paid-up capital, which is the total amount of capital actually received by the company from shareholders for the issued shares.
7.Reserve Share Capital
Reserve share capital refers to the portion of a company’s share capital that is set aside and not available for distribution as dividends to shareholders. It represents the accumulated profits or reserves of the company that have been retained for various purposes, such as future expansion, investment, or contingencies.
Reserve share capital acts as a financial cushion for the company and can be utilized to strengthen its financial position, fund future projects, or address unexpected challenges. It helps to ensure the long-term sustainability and growth of the company by retaining earnings within the business.
8.Uncalled Share Capital
Uncalled share capital refers to the portion of a company’s issued share capital that has not been requested or demanded for payment by shareholders. It represents the amount of money that shareholders have committed to pay for their shares but have not yet been called upon by the company.
The company has the right to make calls on the shareholders to pay the remaining amount of their share capital at a later stage, usually when the company requires additional funds. Until the calls are made, the uncalled share capital remains a liability of the shareholders to the company.
Advantages of Share Capital:
1.Increased Capital: Share capital allows companies to raise funds by issuing shares to investors. This can provide a significant amount of capital that can be used for business expansion, investment in new projects, research and development, or debt repayment.
2.Limited Liability: Shareholders in a company have limited liability, meaning their personal assets are protected in case of company debts or legal issues. They are only liable for the amount they have invested in the shares and are not personally responsible for the company’s debts.
3.Ease of Transferability: Shares can be easily bought and sold in the stock market, providing shareholders with liquidity and the ability to exit their investment when desired. This flexibility allows investors to diversify their portfolios and manage their investments more efficiently.
4.Professional Management: By issuing shares, companies can attract investors who bring expertise, experience, and knowledge to the business. Shareholders often have the opportunity to participate in decision-making through voting rights, but they can also delegate day-to-day management to professional managers.
5.Retained Control: Unlike borrowing funds through loans or debt financing, raising capital through share issuance does not involve giving up control over the company. Existing shareholders can retain control and decision-making power while benefiting from the infusion of new capital.
Disadvantages of Share Capital:
1.Dilution of Ownership: When new shares are issued, the existing shareholders’ ownership stake in the company may be diluted. This means that their proportional ownership and control over the company decrease, which can be perceived as a disadvantage by some shareholders.
2.Dividend Obligations: Companies that issue shares may have to pay dividends to shareholders, especially in the case of preference shares. This regular dividend payment obligation can put financial strain on the company, especially during periods of low profitability or cash flow challenges.
3.Market Volatility: Share capital exposes companies and shareholders to the volatility of the stock market. Share prices can fluctuate based on market conditions, investor sentiment, economic factors, or company-specific events. This volatility can lead to significant gains or losses for shareholders.
4.Disclosure and Transparency Requirements: Companies with share capital must comply with various regulatory and reporting requirements. This includes disclosing financial information, strategic plans, and other material information to shareholders and the public. Compliance with these requirements can be time-consuming and expensive for companies.
5.Loss of Privacy: Publicly traded companies, which have share capital listed on stock exchanges, are subject to extensive public scrutiny. Shareholders’ personal information, company financials, and other sensitive data may become publicly available, reducing privacy for both the company and its shareholders.
It’s important to note that the advantages and disadvantages of share capital can vary depending on factors such as the company’s size, industry, growth stage, and the specific terms and conditions of the shares issued.
How to Calculate Share Capital?
To calculate share capital, you need to consider the number of shares issued by a company and the nominal value or face value of each share. Here’s the formula for calculating share capital:
Share Capital = Number of Shares Issued x Nominal Value per Share
Let’s break down the calculation step by step:
1.Determine the Number of Shares Issued: This refers to the total number of shares that the company has issued to shareholders. It can be obtained from the company’s records or financial statements.
2.Identify the Nominal Value per Share: The nominal value, also known as face value or par value, is the predetermined value assigned to each share at the time of issuance. It is usually denoted in the company’s currency. The nominal value is typically a nominal amount (e.g., $1 or £1) and is not directly related to the market value of the share.
3.Multiply the Number of Shares Issued by the Nominal Value per Share: Multiply the number of shares issued by the nominal value per share using the formula mentioned above. The result will give you the total share capital of the company.
For example, let’s assume a company has issued 10,000 shares with a nominal value of $1 per share. The calculation for share capital would be:
Share Capital = 10,000 shares x $1 per share Share Capital = $10,000
Therefore, the share capital of the company in this example would be $10,000.