Share Capital

Share Capital

Share capital is the money raised by a company from investors in the form of shares. It is a type of long-term debt that is represented by shares, which are negotiable securities that represent ownership in a company.

Key Features of Share Capital:

• Source of Funds: Share capital is a major source of funds for companies. It is used to finance their operations, investments, and expansion.
• Ownership: Shareholders own the company through their shareholdings. They have certain rights, such as voting rights and dividend rights.
• Par Value: Each share has a par value, which is the nominal value of the share.
• Market Value: The market value of a share is determined by the demand and supply of the shares in the market.
• Dividends: Companies may pay dividends to shareholders as a return on their investment.
• Control: Shareholders have control over the company through their voting rights. They can influence company decisions and elect directors.

Types of Share Capital:

• Common Stock: Ordinary shares that represent the common ownership of a company.
• Preferred Stock: Shares that have a higher claim on assets and dividends than common stock.
• Treasury Stock: Shares that are owned by the company itself.

Advantages:

• Access to Capital: Share capital provides companies with access to a large pool of funds.
• Lower Cost of Debt: Compared to loans, share capital generally has a lower cost of interest.
• Increased Liquidity: Share capital can increase the liquidity of a company.
• Dividends: Dividends can provide a source of passive income for shareholders.

Disadvantages:

• Agency Costs: Investors may incur agency costs, such as brokerage fees and transaction costs.
• Shareholder Rights: Shareholders have limited rights compared to owners.
• Risk of Loss: Shareholders can lose money if the company fails.
• Common Law Liabilities: Shareholders are liable for the company’s common law debts.

Conclusion:

Share capital is an important component of a company’s capital structure and plays a crucial role in its financial health. It is a source of funds, ownership, and control for shareholders. Understanding the key features and types of share capital is essential for investors and businesses alike.