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.
FAQs
What is meant by share capital?
Share capital refers to the total amount of money a company raises by issuing shares to investors. It represents the funds that shareholders invest in exchange for ownership in the company.
What is called-up share capital?
Called-up share capital is the portion of the total share capital that shareholders have been asked to pay. It is the amount that the company has “called” for payment from the shareholders.
What are the different types of share capital?
The main types of share capital include authorized share capital (the maximum amount a company can issue), issued share capital (shares actually issued), subscribed share capital (shares subscribed by investors), and paid-up share capital (amount paid by shareholders).
What is share capital with an example?
Share capital is the money a company raises from issuing shares. For example, if a company issues 1,000 shares at $10 each, its share capital is $10,000.
