Capital stock

Capital stock refers to the total number of shares that a company is authorized to issue to investors. It is a significant component of a company's equity and is often used as a measure of a company's financial health and stability.

Overview

Capital stock is divided into two main categories: common stock and preferred stock. Common stockholders have voting rights in the company and may receive dividends, while preferred stockholders have a higher claim on the company's assets and earnings, and receive dividends before common stockholders.

The number of authorized shares is set in the company's articles of incorporation, but the company does not have to issue all these shares. The shares that are issued and are in the hands of investors are known as outstanding shares. The shares that the company has not issued are known as treasury shares.

Valuation

The value of capital stock is recorded on the company's balance sheet under the shareholders' equity section. The value is based on the par value of the shares, which is a nominal value assigned to the shares when they are issued. The par value is typically a small amount and does not reflect the market value of the shares.

When a company issues shares for more than their par value, the excess amount is recorded as additional paid-in capital, which is also part of shareholders' equity.

Role in Corporate Finance

Capital stock plays a crucial role in corporate finance. It is a primary source of funding for a company. The funds raised from the issuance of capital stock can be used for various purposes such as paying off debt, funding capital expenditures, and financing business operations.

In addition, the capital stock structure of a company (the mix of common and preferred stock) can influence its financial stability and growth potential. A company with a high proportion of common stock may be seen as more risky, but it also has more potential for growth as common stockholders have a claim on the company's future earnings.

See Also

• Stock market
• Equity (finance)
• Share (finance)
• Corporate finance