Share Capital

By: EconomyWatch   Date: 23 November 2010

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Share Capital is the fund raised by a company through the issuance of common or preferential shares to individuals / institutional investors for the growth and expansion related aspects of the company. It is also known as Equity Financing through which the shareholders of the issued capital receive rights of ownership in the concerned company by buying shares of the same. Buyers of the Share Capital become owners of the company in accordance to their stake in the same and hence possess certain degree of control over its operation.

Amount of share capital a company possesses is a variable. As a company issues more and more shares to the public in lieu of fund, the amount of share capital increases.

In the balance sheet of a company, issuing the share capital, it only reports the initial amount at which the share capitals were issued in the primary market. The company does not take into account any price appreciation or depreciation occurring due to the transactions in the secondary market into its balance sheet.

Share Capital may consist of :-

a)Common Share

It gives an ownership right to the holders of the stock and hence the share holders are entitled to the earnings of the company according to their stake. Holders also get dividends on those stocks as and when given by the company.Liquidity of common stocks are very high and can be bought and sold at any time of the market hours.

b)Preferred Share

These stocks also give ownership right to its holders. Its holders enjoy the privilege of receiving dividends from the company in preference to any other common share holders.

Preferred stocks have less liquidity than the common stocks.

Share Capital issuance are most likely to benefit the small businesses who suffer from lack of initial cash flow. Through this, small businesses get easy access to fund. Share Capital are also advantageous to a small business owner because he has no obligation for repayment of money to the investor.

The main disadvantage of financing through share capital route is that the owner(s) has to give-up certain amount of control from the business because buyers of the Share Capital become part owners of the company in accordance to their stake in the same and hence possess certain degree of control over its operation. Thus, the owner is now not free to take any decision as per his ideas but has the obligation of getting it approved from the board of shareholders.

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