Capital Stock

What Is Capital Stock?

Capital stock addresses the total number of shares issued by a company. For a publicly traded company, that is the number of common stock and preferred stock shares issued. Capital stock is alluded to as paid-in capital when investors put their money into a company and receive shares in return.
The number of common and preferred shares can be found in the shareholders' equity section of a company's balance sheet. For listed companies, the balance sheet is part of the quarterly or annual report recorded with the Securities and Exchange Commission. A few companies, however, only have common shares. All things considered, each company has its own method of recording capital stock and its own utilization of terms.

How Does Capital Stock Differ From Authorized Stock?

While capital stock will be stock that a company sells, authorized stock, as the name infers, is the number of shares legally authorized by a company. At the point when a corporation is legally incorporated or a company sets its charter in a state, it outlines the total number of shares its executive management has authorized it to issue. In this way, capital stock can't surpass authorized stock, which is the broadest category of shares.

How Is Capital Stock Valued?

The value of capital stock is normally a combination of its paid-in capital in light of par value and its additional paid-in capital.
A company ordinarily sets its common stock's par value at a minimum, regularly well below the offering price at the time they open up to the world, for the purpose of accounting. The par value is a nominal figure, to show that the shares are accounted for in shareholders' equity, and furthermore to meet a state government's requirement that shares can't be sold at below their par value. The par value for preferred stock, on the other hand, can be not quite the same as that for common stock on the grounds that dividends paid to preferred shareholders are calculated in light of the par value. In any case, for certain companies, the par value for common and preferred stock are something similar. In different cases preferred shares have no par value.
Additional paid-in capital is the difference between what is paid by investors for a company's stock at market value and its par value at the hour of its initial public offering, or what's known as paid-in capital in excess of par value. Additional paid-in capital is commonly used to offset the stock at par value. A few companies, however, only rundown stock at par value and don't list additional paid-in capital since they haven't issued new shares or repurchased stock. A few companies have separate passages for contributed capital (paid-in capital) and additional paid-in capital, while some could combine the two into one.
At the point when a company chooses to sell new shares (by means of a follow-on offering or secondary offering) or repurchase stock, the amount of capital stock changes and is recorded for that period.
Note: Whenever a company sells new shares to raise capital, that weakens the value and voting rights of shares held by existing common shareholders.
Common shares that are bought back can be set to the side by the company as treasury shares, which can be listed as a separate, negative line thing since it is considered a contra equity account (against paid-in stock) within shareholders' equity.

Is Treasury Stock Included in Capital Stock?

Treasury stock will be stock that was issued by a company and in this manner repurchased. That stock is never again part of shares outstanding, and a company can involve it for employee compensation (stock options, awards, and so on.). Treasury stock remains part of issued shares however conveys restrictions like lack of voting rights and no entitlement to dividend payments. At the point when a company repurchases shares from the open market, treasury shares are registered as a contra equity account in shareholders' equity section of the balance sheet.

Capital Stock Examples: Apple (NASDAQ: AAPL) and Netflix (NASDAQ: NFLX)

Below is Apple's recording of its common stock and additional paid-in capital as a single thing on its balance sheet. The par value for its common stock is set at 1/1000 of a penny, and that means that legally, Apple's listed stock price can't go below that par value. An expanded entry shows beginning and ending balances for its share capital to reflect shares that were granted to employees as compensation.

Below is Netflix's shareholders' equity, wherein it combines its common stock capital and additional paid-in capital. Preferred stock is a separate line thing, however is left blank in light of the fact that while there were shares authorized, none were issued. The paid-in capital and additional paid-in capital are listed in a single line. In the interim, Netflix has a separate entry for treasury stock, which is a contra equity account to show that shares were repurchased and placed as treasury for 2021.

Apple and Netflix have their own approach to recording capital stock on their balance sheets, and different companies are likely to follow their own arrangements, whether they combine share capital and additional paid-in capital into one entry or creating separate ones.

Features

• Issuing capital stock permits a company to fund-raise without incurring debt.
• Capital stock is the amount of common and preferred shares that a company is authorized to issue — recorded on the balance sheet under shareholders' equity.
• The drawbacks of issuing capital stock are that the company relinquishes more control and weakens the value of outstanding shares.
• The amount of capital stock is the maximum amount of shares that a company can at any point have outstanding.

FAQ

What's the Difference Between Paid-In Capital and Capital Stock?

Capital shares are alluded to as paid-in capital when investors buy a company's shares.

Could Capital Stock Be Negative?

Common and preferred stock have a par value that is the nominal value of the shares. A stock's price technically can go to zero in the open market, depending on the state's rules where it was incorporated, yet can't be negative.

Are Issued Shares Also Outstanding?

That relies upon the company issuing the shares. A company might have a bigger number of shares issued than outstanding, and the difference might be held as treasury stock.

Will Capital Stock Increase?

Indeed, when a company issues new common or preferred stock, generally to raise capital, after its initial public offering the number of issued shares increases.

Does a Stock's Current Market Price Affect Its Paid-In Capital?

No, shares that trade in the open market don't influence a company's paid-in capital, since paid-in capital is recorded at the hour of a company's IPO.

How Does Additional Paid-in Capital Differ From Capital Stock?

Additional paid-in capital, or share premium, is the amount paid for stock over the par value for stock issued at the hour of a company's offering.