Share capital or capital stock (US English) refers to the portion of a company's equity that has been obtained (or will be obtained) by trading stock to a shareholder for cash or an equivalent item of capital value. For example, a company can issue shares in exchange for computer servers, instead of purchasing the servers with cash.
The term has several meanings. In its narrow, classical sense, still commonly used in accounting, share capital comprises the nominal values of all shares issued (that is, the sum of their "par values"). In a wider sense, if the shares have no par value or the allocation price of shares is greater than their par value, the shares are said to be at a premium (called share premium, additional paid-in capital or paid-in capital in excess of par); in that case, the share capital can be said to be the sum of the aforementioned "nominal" share capital and the premium. In the modern law of shares, the "par value" concept has diminished in importance, and share capital can simply be defined as the sum of capital (cash or other assets) the company has received from investors for its shares.
Besides its meaning in accounting, described above, "share capital" may also be used to describe the number and types of shares that compose a company's share structure. For an example of the different meanings: a company might have an "outstanding share capital" of 500,000 shares (the "structure" usage); it has received for them a total of 2 million dollars, which in the balance sheet is the "share capital" (the accounting usage).
The legal aspects of share capital are mostly dealt with in a jurisdiction's corporate law system. An example of such an issue is that when a company allocates new shares, it must do so in a way that does not inequitably dilute existing shareholders.
- Authorized share capital is also referred to, at times, as registered capital. It is the total of the share capital which a limited company is allowed (authorised) to issue. It presents the upper boundary for the actually issued share capital.
- Issued share capital is the total of the share capital issued (allocated) to shareholders. This may be less or equal to the authorised capital. Previously, issued capital comprised common equity shares as well as all preferred shares. But now only irredeemable preferred shares can be shown as part of issued share capital. The shared capital of a company is constantly changing. They company can give out more shares to their shareholders or buy them back, increasing or reducing the issued share capital, respectively. Issued share capital is not affected by the market price of shares. The value of issued capital presented in the financial statements is simply the number of issued shares multiplied by the face value of each share. For example, if a company issues 50,000 shares for $1 and the market price is at $2 per share, the issued share capital would still only be $50,000, and not $100,000.
Issued capital can be subdivided in another way, examining whether it has been paid for by investors:
- Subscribed capital is the portion of the issued capital, which has been subscribed by all the investors including the public. This may be less than the issued share capital as there may be capital for which no applications have been received yet ("unsubscribed capital").
- Called up share capital is the total amount of issued capital for which the shareholders are required to pay. This may be less than the subscribed capital as the company may ask shareholders to pay by installments.
- Paid up share capital is the amount of share capital paid by the shareholders. This may be less than the called up capital as payments may be in instalments ("calls-in-arrears") .
A start-up company can raise finance by selling shares to external investors. This is typically to a venture capitalist. Once the initial investment has been made the company owns the monetary contribution. The shareholder can receive a return on the investments through payments out of profits, known as dividends, or by increases in the value of the company when it is sold. The shareholder benefits from limited liability, meaning they are only responsible for the money they invested and not for any debts that the company accumulates.
An entrepreneur of the start-up company is very likely to invest in its share capital using cash or personal investments. Ideally, the founding entrepreneur will buy up all of the capital share of the company and solely own the business.