What is ‘Share Capital’
Share capital consists of all funds raised by a company in exchange for shares of either common or preferred shares of stock. The amount of share capital or equity financing a company has can change over time. A company that wishes to raise more equity can obtain authorization to issue and sell additional shares, thereby increasing its share capital.
BREAKING DOWN ‘Share Capital’
With share capital, the amount a company reports on its balance sheet only accounts for the total amount initially paid by shareholders. If those shareholders later resell their shares on the secondary market, any difference between the initial and subsequent sales prices does not impact the company’s share capital.
The term “share capital” is often used to mean slightly different things, depending on the context. When discussing the amount of money a company can legally raise through the sale of stock, there are actually several categories of share capital. Accountants have a much narrower definition.
Authorized, Issued and Paid Share Capital
Before a company can raise equity capital, it must obtain permission to execute the sale of stock. The company must specify the total amount of equity it wants to raise and the base value of its shares, called the par value. The total par value of all the shares a company is permitted to sell is called its authorized share capital. While a company may elect not to sell all its shares of stock during its initial public offering (IPO), it cannot generate more than its authorized amount. If a company obtains authorization to raise $5 million and its stock has a par value of $1, for example, it may issue and sell up to 5 million shares of stock.
The total value of the shares the company elects to sell is called its issued share capital. Not all these shares may sell right away, and the par value of the issued capital cannot exceed the value of the authorized capital. The total par value of the shares that the company sells is called its paid share capital. This is what most people refer to when speaking about share capital.
Share Capital in Accounting
The technical accounting definition of share capital is the par value of all equity securities – either common or preferred stock – sold to shareholders. Lay people, however, often include the price of the stock above par value in the calculation of share capital. The par value of stock is typically $1 or less, so the difference between the par and sale price of stock, called the share premium, may be considerable, but it is not technically included in share capital or capped by authorized capital limits.
Assume company ABC issues and sells 1,000 shares. Each share has a par value of $1 but sells for $25. The company accountant logs $1,000 raised as paid share capital and the remaining $24,000, attributed to share premium, as additional paid in capital.