The term shares frequently refer to ‘share capital’. The word ‘shares’ is used as a short form of ‘share capital’.
Capital usually refers to investment in a business. It is money for starting or investing in a company. Sometimes, the word ‘capital’ is also used as a short form of ‘share capital’. However, the word ‘capital’ includes both shares and long term borrowings.
Share capital refers to the money which is attributable to the owners of the company: This includes common stock and preferred stock (but does not include borrowings and debts).
Ordinary share capital (or common stock):
Ordinary share capital or common stock refers to primary shares of the company. This type of shares of the company contains ownership rights, and this is the most common type of shares. These shareholders have the rights to appoint the company’s directors at the election of shareholders.
These shareholders have the residual interest in the company, i.e., in the case of winding up of the company, whatever remaining assets will remain after payment of all other liabilities, loans, preference dividend, taxes etc. that residual assets will be distributed among ordinary shareholders.
Preference share capital:
Preference share capital is the second type of share capital where preference shareholders are entitled to a predetermined preference dividend. The dividend amount is fixed at the time of issuance of these shares. These shareholders usually do not have voting rights at the annual general meetings of the company. These shares do not have an expiry or maturity date, similar to ordinary share capital.
Authorized share capital:
Every company is run under defined regulations contained in the memorandum of association and the articles of association of the company. These regulations specify an authorized amount of the share capital of the company. The authorized share capital of the company is the maximum amount of share capital which a company can issue. For example, a company’s regulations may state that the authorized share capital is $10,000,000. This clause means that the company can issue a maximum of $10,000,000.
The nominal value of shares:
Nominal value of the stock is the value of the share stated on its share certificate. The nominal value of the share is the par value of one share of the company. Usually, the nominal value of the shares is $1. However, these shares may be traded on a stock market at a value significantly higher than the nominal value, e.g., $5 or $20.
The market value of the shares:
The market value of the shares is the value of the share at which a transaction is carried out in the market. The market value of the shares may be significantly higher (or lower) than the nominal value of the shares.
Issued Share Capital:
Issued share capital means the amount of share capital which has been issued by the company out of its total authorized share capital. Let’s say that if the company’s authorized share capital is $10 M, the company may issue only $2 M out of it at one instance. Later on, the company may issue further shares of $1 M. Thus; company’s issued share capital is always less than or equal to its authorized share capital. It is important to note that the value of the issued shares of the company in the company’s balance sheet will always be represented at the nominal value of the shares. For example, the $2 M issue which we talked about here, is the nominal value of the shares and not the market value.
Let’s say that if the nominal price of a company’s share is $1 per share, and it issues 1 million shares at a market value of $2 per share. In this case, the company’s issued share capital shall be considered as $1 M only. This is because issued share capital is booked at the nominal value of the shares of the company.
Issuance of share capital:
Issuance of share capital means that the company collects share price from the investors and award them shares of the company (in the form of written certificates). Once investors purchase these share certificates, those investors become shareholders of the company.
Share certificates are the written pieces of paper which contain the number of shares and the name of the shareholder duly authorized by the company. For a shareholder, a share certificate is proof of the share ownership.
Subscribed share capital:
Subscribed share capital is the amount of the share capital, which has been purchased by the shareholders. This is usually equal to the issued share capital. For the sake of understanding, consider the below press release from a company, “We had announced to issued $ 2M share capital, and all of that got subscribed within a week.” This statement means that when the company announced to issue share capital and invited investor to invest money, the investors subscribed (submitted application forms along with fees, etc.) all share capital.
Paid-up Share capital:
Share capital of the company for which the shareholders have made payment to the company. Shareholders are liable to make the payment for the shares after they subscribe to the shares within a particular time. Sometimes, a shareholder may subscribe the share capital by submitting application forms, but later on, does not complete the payment. However, usually, paid-up share capital is equal to the subscribed share capital of the company, which in turn is equal to the issued share capital of the company.
Called up share capital:
This is the part of the share capital for which the subscribers have not made payment of the share capital, i.e., shareholders. For these shares, the company has requested the payment, but payment is not yet made. Called up share capital is a contrast to paid-up share capital. Once the payment for the called up share capital is made, it will be converted into paid-up share capital.
Callable share capital:
This is the part of the share capital for which payment has not yet been requested by the issuer of the capital. The company has the right to call up (i.e., raise demand for the payment against these shares) against this share capital.
Payment made by the shareholders to the issuer company for the purchase of shares in excess of the nominal share price of the company. This means that if the company’s nominal value of shares is $1,000 (i.e., 1,000 shares for $1 each) and the company issued these shares at a price of $1.5 each, i.e., for $1,500 then the additional amount of $500 ($1,500 minus $1,000) will be share premium. Share premium is kept as a capital reserve in the books of the company.
A company which is issuing its shares to the investors/shareholders is called issuer company.
A capital reserve on the balance sheet of the company is a reserve which is not created through routing profit from profit and loss account. This means that this reserve is not created from the profits of the company. Instead, this reserve is directly created from contributions from some other sources. For example, the share premium payment made by shareholders above the nominal price of the share is reserved in the share premium account. This share premium account is an example of capital reserves. Another example of the capital reserve is an asset revaluation reserve which is created as a result of an upward revaluation of property, plant and equipment. A capital reserve cannot be used to pay dividends to the shareholders.