Capital Stock

What is Capital Stock?

The Capital stock is the number of common shares that a company is allowed to issue. It is a combination of common and preferred shares. The amount of the shares is listed in the Balance Sheet of the company’s shareholders’ equity section. Issuing a capital stock authorises the company to raise money without having to worry about the incurring of debt.

The capital stock is issued by a company to raise their capital in order to grow its business. These shares are outstanding in nature. These outstanding shares when issued to investors is not necessarily equal to the number of available or authorised shares. The authorised shares are those shares that a company is legally able to issue while the outstanding shares are those that have been issued and remain as outstanding to the shareholders. The drawbacks of such shares are that the company would be relinquishing more of its equity while diluting the value of the outstanding share.

Important Points about Capital Stock

Companies can issue some of the capital stock over a period or buy back shares that are owned by the company’s shareholders. Previously the outstanding shares that are purchased again by the company are known as treasury shares.

Authorised shares stock is the maximum number of shares that a company can issue during the period of its existence. Those shares can either be common or preferred in nature. A company can issue shares over time as long as the total number of shares does not go over the authorised amount of shares.

Preferred stock is listed first in shareholders’ equity section because the owners receive dividends on this stock even before the owners of common stock. The par value of such stock is different from the common stock. Total Par value is equal to the number of preferred stock shares that are outstanding times the per value per share.