Capital stock, comprises on both common and preferred stock, can only be issued by the company and is normally used to lift capital to grow and operate the business. Different companies can also issue stock to compensate for assets like land, facilities or equipments. Investors buy capital stock seeking returns.
A company is allowed to issue additional capital stock over time, or buy back the shares at present held by shareholders. When people give money to the company as an investment in their success for the sake of getting percentage ownership in the company, in this way they have capital stock.
Division Of Capital Stock:
Capital stock can be divided into two main subsections, i.e.,
- Common Capital stock
- Preferred stock
Common stock is typically issued by U.S. based corporations, whereas only a small percentage of corporations issue preferred stock. The values of preferred stock and common stock vary and are used to work out share payments.
How Capital Stock Value Is Reported?
The value of capital stock that is reported dependent upon whether the stock has a stated (par) value. Par value is defined as a set dollar amount assigned to each common share. The dollar amount a corporation receives in replace for shares of capital stock is reported as paid in capital balance in the equity section of the company’s balance sheet and stockholders.
How Does The Value Of Capital Stock Calculate?
The dollar value of a company stock is random typically one penny or less and is assigned specifically for balance sheet treatment purposes when the company is issuing share capital. The par value is unconnected to the market price. To calculate the value of capital stock, use the following equation:
Value of capital stock = (Par value per share) x (Number of shares issued)
The issuance of capital stock has several advantages including:
- The facility to finance new growth without going into debt. Rather than taking out a expensive loan, the company can sell capital stock to fund its growth.
- The amount of capital raised by selling stock may be more than the funding received had the company taken out a loan from a bank.
- Issuing stock allows the company to benefit from the expertise and resources of the qualified business people who are their stockholders.
- Since these investors own part of the company, they are quite accurately invested in the success of company and there is a motivation for them to lend their services and resources to facilitate profitability.
Issuing stock can also have some drawbacks as well and these can include:
- Relinquishing part of the equity company. By selling capital stock to investors, the company is giving up some of its ownership.
- Dilution of share value. The more capital stock the company issues, the more weak the value of each share becomes.
- The number of shares that can be sold is limited. Finally, there will be no more ownership in the company to offer to investors.