Shares usually refer to ownership in the company. It is an important concept in the corporate world. Share capital is the capital companies raise through the issuance of shares. It can be divided into different types. Today, we will learn about types of share capital, classes, how they impact a company, and more.
A brief definition of share capital
By definition, It is the capital or money a company raises by issuing common and preferred stocks. According to the company laws, it refers to the total value of funds raised by the company through the issue of shares to its shareholders. It is also known as equity capital, shareholders capital, paid-in capital, and contributed capital.
The importance of share capital in a company
It plays a crucial role in a company. It helps the company expand and grow towards the company’s goals. It also helps to reach the desired capital requirements for the company to acquire, minimize debts, boost investors’ trust, and more. In this ever-changing and highly competitive corporate landscape, share capital plays a vital role in any company.
Types of share capital
It can be divided into several types based on individual characteristics. Here, we will discuss some essential types of share capital.
A. Authorized share capital
1. Definition and purpose
By definition, authorized share capital refers to the maximum amount of the capital of the shareholders that the company is authorized to issue as per its constitutional/legal documents.
2. How companies determine the authorized share capital
Before a company is established, it has to specify the total amount of equity it wants to raise. It must also determine the base value of this share which is also known as value per. There are no specific limits for the companies on the number of shares they can issue in total. The limit primarily pertains to the total amount of money it can raise from the stocks it sells.
B. Issued share capital
1. Explanation of issued shares
Another primary type of share capital is issued share capital or issued shares. Issued shares refer to the total value of shares the company chooses to sell to shareholders or investors. However, one must remember that the par value of issued shares cannot exceed the value of the authorized share of that company.
2. Process of issuing shares to the public or private investors
The process of issuing shares to the public or private investors is simple. The portion of the shareholders’ capital that the company has issued is circulated and held by shareholders of the private and public domains. The company shares or sells issued stocks with the promise to pay in full at a later date.
C. Subscribed share capital
1. What it means for shareholders to subscribe
Subscribed share capital refers to the amount of issued capital that companies are subscribed to by the shareholders or investors. In other words, subscribed shares are company-issued shares that investors or shareholders have been subscribed to or committed to purchase.
2. Factors influencing subscription rates
When it comes to the rates of subscription, there are several factors that can influence the ratio. This may include market trends, market sentiment, changes in price strategies, the individual investor’s experience, and so on.
D. Paid-up share capital
1. Defining paid-up capital
Paid-up capital generally refers to the portion of the subscribed share that the investors have paid. So, this type of share capital represents the actual amount of money that the company has received through the exchange of the issued share.
2. Importance of having paid-up shares for a company
Paid-up share capital plays a crucial role in the company’s financial structure. It is because this type of share capital refers to the actual equity investment made by the shareholders or investors. Also, it plays a pivotal role in determining creditworthiness, financial stability, and investors’ confidence in the company.
Read More: Preference shares: Definition, types, and features
Classes of share capital
Classes of share capital are the classes of share capital that a company has issued. There are two common classes of share capital equity common share and preferred share. Here we will discuss them in detail:
A. Common shares
Common share is a popular share class issued by the company. It is also known as equity share or ordinary share.
1. Features and rights of common shareholders
The common share or equity share has several key features that differentiate it from its counterpart. The key features and rights of common shareholders include voting rights, having a share in the company profits, and the ability to partially impact the company’s business decisions.
2. Common scenarios involving common shares
When it comes to discussing the common scenarios involving common shares you may take the example of shareholders’ participation in corporate board meetings, and company decisions through their voting powers. To be more specific, they can participate in the election of the board of directors, vote on different corporate objectives, and policies, and more.
B. Preferred shares
Another important share capital class worth mentioning here is the preferred share. Preferred shares are also company-issued but contain individual characteristics and benefits.
1. Characteristics and benefits of preferred shares
Preferred shareholders have preferential rights over common shareholders or equity shareholders. They basically have a fixed or predetermined rate of dividend and are paid the decided dividend before the other equity holders. They also have a higher claim on the company’s assets when it comes to liquidation.
2. How preferred shares differ from common shares
Preferred shares differ from the common shares. Here are some common points over which the common shares and preferred shares differ:
| Common shares | Preferred shares |
| Common shares have varying dividend rates. | Preferred shares have fixed dividend rates. |
| Common shares present a lower claim on assets during liquidation. | Preferred shares have a higher claim on assets during liquidation. |
| Common shares come with voting rights | Preferred shares do come with voting rights |
| Preferred shares come with the power to impact the company’s decisions such as policies, the election of the board of directors, etc. | Preferred shares do come with such power to impact the company’s decisions. |
How share capital impacts a company
Shareholder capital plays an important role in a company. Let us discuss how different types of share capital impact a company.
A. Role in financial structure
It can significantly impact the financial structure of a company. It can include deciding the budget for acquiring assets, expansion plans, taking up new projects and even paying off debts. The shareholders usually try to ensure that the share capital is properly used.
B. Influence on decision-making
Shareholders participate in major decision-making processes of a company through their voting rights. Many companies offer voting rights to their shareholders which ensures their engagement in major decision-making events like the appointment of a board member or the distribution of dividends.
C. Significance for Investors
It also increases the importance of investors in a company. As they have investments in the common or preferred capital of a company, they gain voting rights and the ability to influence major decisions. Also, a company cannot decide on crucial things without discussing them with their investors.
Conclusion
It is a crucial subject in corporate and financial matters. It refers to the amount of capital a company wants to raise by insurance of shares to the investors or shareholders. Whether you are a finance enthusiast, share market investor or business professional learning about share capital is essential.
A. A recap of key points
It is simply the amount of money or capital a business wants to raise through the sale of shares. There are primarily 4 types of share capital that exist in the market. This includes authorized shares, issued shares, subscribed shares and paid-up share capital. Apart from this share capital or shareholders’ capital can be categorized into two classes: equity or common shares and preferred shares. Share capital plays a crucial role for a company whether it comes to decision-making, fundamental role in financial structure, and boosting investors’ confidence in the company.
B. The importance of understanding share capital for investors and businesses
It is an essential subject in corporate finances. It is very important for both investors and businesses. As share capital refers to the amount of money or capital the company wants to raise by selling its shares, both investors and businesses need to understand the different types of share capital and how they work. The best way to learn and understand share capital is to read about the share capital and keep yourself updated.
FAQs
1. What are the 4 types of share capital?
The 4 types of share capital are authorized share capital, paid-up share capital, issued share capital, and subscribed share capital.
2. How many types of capital stocks are there?
There are two types of capital stocks: preferred stock and common stock.
3. How many types of shares are there?
Primarily there are two kinds of shares. One is an ordinary equity share and the other is a preference share. Other types of shares can include redeemable shares, cumulative preference shares, and non-voting shares.
4. Which type of account is share capital?
Share capital usually falls under the category of common capital account.
