What Is Capital Stock And Examples Of Capital Stock?

What Is Capital Stock?

Capital Stock is the amount of common and preferred shares that a company is entitled to issue in accordance with the company’s charter. Capital Stock can only be issued by a company and is the maximum number of shares that can remain outstanding. The amount is recorded on the company’s balance sheet in the shareholder’s equity section.

KEY TAKEAWAYS

Capital Stock is the amount of common and preferred shares that a company is authorized to issue – it is recorded on the balance sheet under shareholders’ equity.

The amount of Capital Stock is the maximum amount of shares a company can ever own.

Issuing Capital Stock allows a company to raise money without borrowing.

The disadvantages of issuing capital stock is that the company gives up more control and reduces the value of shares outstanding.

Understanding Capital Stock

Capital Stock a company may issue to raise capital to expand its business. The shares issued can be bought by investors — seeking to raise prices and earnings — or they can be exchanged for assets, such as equipment needed for operations.

The number of shares outstanding, which are shares issued to investors, does not necessarily equal the number of shares available or authorized. Authorized shares are those that a company can legally issue – Capital Stock, while outstanding shares are those that have already been issued and are outstanding for shareholders.

Issuing Capital Stock allows a company to raise funds without the burden of debt and the interest charges associated with it. The disadvantages are that the company will give up more of its shares and reduce the value of each outstanding share.

The money a company receives from a Capital Stock is considered a capital contribution from investors and is reported as paid-in capital and additional paid-in capital in the equity section of the balance sheet.

The common stock balance is calculated as the par value or par value of common stock multiplied by the number of shares of common stock outstanding. The par value of a company’s stock is the estimated value allocated for balance sheet purposes when a company issues shares — usually $1 or less.

An Example of a Capital Stock

If a company is given permission to raise $5 million and its stock is worth $1, it can issue and sell 5 million shares of stock. The difference between the par value of the share and the selling price is applied as additional paid-up capital under equity.

If the stock were sold for $10, then $5 million would be recorded as paid up capital, while $45 million would be treated as additional paid up capital.

Consider, Apple (AAPL), which authorized 12.6 million shares with a face value of $0.00001. 12.6 million of its capital. Meanwhile, as of June 27, 2020, Apple has issued 4,283,939 shares and 4,443,236 shares outstanding.

Special Considerations

Companies may over time issue some capital stock or buy back shares currently held by shareholders. The first publicly traded shares purchased by a company are known as treasury shares.

Approved stock refers to the maximum number of shares a company is allowed to issue based on board approval. These shares can be either common shares or preferred shares. The company may issue shares over time, as long as the total number of shares does not exceed the authorized amount. Licensing many shares is a process that incurs legal costs, and allowing more shares to be issued over time is one way to improve this cost.

Preferred shares are listed first in the equity section of the balance sheet, because their owners receive dividends before the owners of common shares, and they have priority during liquidation. Its par value differs from common stock, and sometimes represents the initial selling price of a stock, which is used to calculate dividend payments.

The total par value is equal to the number of shares of preferred stock multiplied by the par value of each share. For example, if a company has 1 million shares of preferred stock outstanding with a par value of $25 each, it reports the par value of $25 million.