What it means
A corporation is owned by its shareholders in proportion to the shares they hold, and capital stock is the accounting and legal record of those shares. Three figures matter.
Authorised capital is the maximum number of shares the company may issue under its charter or articles, which can be increased only by shareholder resolution. Issued capital is the number actually issued to shareholders.
Outstanding capital is the number issued less any repurchased and held as treasury stock. The balance sheet reports issued and outstanding shares; authorised shares are disclosed but carry no value until issued.
Shares usually carry a par or nominal value, an arbitrary amount (often $0.01 or $1) set in the charter, and are issued for more than par. The par value multiplied by shares issued is the capital stock account; the excess is additional paid-in capital (US) or share premium (UK and IFRS).
Some jurisdictions allow no-par shares, in which case the whole amount received is recorded as capital stock or as stated capital. The split has legal rather than economic significance: par value historically set the minimum a share could be issued for and the amount of capital that had to be maintained for creditors.
Common stock carries voting rights and the residual claim on profits and assets. Preferred stock carries a fixed dividend paid before any common dividend, priority on liquidation, and usually no vote; it may be cumulative (missed dividends accumulate), convertible into common, redeemable, or participating.
Companies may issue several classes of common stock with different voting rights, as founders of technology companies often do to retain control after listing. Capital stock changes with issues (for cash, for acquisitions, under employee share schemes, as bonus shares from reserves), with buybacks and cancellations, and with stock splits, which increase the number of shares and reduce the par value proportionately without changing the total.
The number of shares outstanding is the denominator of earnings per share and book value per share, so movements in capital stock affect per-share measures directly. For readers of financial statements, capital stock together with additional paid-in capital shows how much the owners have put in, and retained earnings shows how much the company has earned and kept; together they make up shareholders' equity.
A company whose equity is mostly retained earnings has grown from its own profits; one whose equity is mostly paid-in capital has been funded by its shareholders and has yet to earn much. Comparing capital stock at par with the market value of the same shares shows how much value the company has created (or lost) since the shares were issued.
In practice
Real-world examples.
Example
A start-up authorises 10 million shares, issues 6 million to founders and investors, and reserves 1.5 million for an employee option pool.
Example
A listed company executes a two-for-one stock split, doubling shares outstanding and halving par value, leaving capital stock unchanged.
Example
A utility's capital stock includes three series of preferred stock with different dividend rates, each listed separately in the equity section.
Think of it
“Capital stock is the ownership shares a company has issued-the basic equity from selling stock.
Formula
Calculation
Capital Stock (at par) = Shares issued x Par value per share
Additional Paid-In Capital = (Issue price minus Par value) x Shares issued
Shares Outstanding = Shares issued minus Treasury shares
Book Value per Share = Total shareholders' equity / Shares outstanding
Worked example. A company is authorised to issue 10,000,000 common shares of $0.10 par and 1,000,000 preferred shares of $10 par. Its history:
- At formation, it issued 4,000,000 common shares at $2.00: capital stock $400,000; additional paid-in capital $7,600,000.
- Two years later it issued 500,000 preferred shares at $10, with a 7% cumulative dividend: preferred stock $5,000,000.
- Last year it bought back 200,000 common shares at $6.00 and holds them as treasury stock: cost $1,200,000, shown as a deduction from equity.
- Retained earnings have accumulated to $9,500,000.
Balance sheet equity:
- Preferred stock (500,000 x $10): $5,000,000
- Common stock (4,000,000 x $0.10): $400,000
- Additional paid-in capital: $7,600,000
- Retained earnings: $9,500,000
- Treasury stock (200,000 shares at cost): minus $1,200,000
- Total shareholders' equity: $21,300,000
Shares outstanding = 4,000,000 minus 200,000 = 3,800,000 common.
Book value per common share = ($21,300,000 minus $5,000,000 preferred) / 3,800,000 = $4.29.
Preferred dividend = 7% x $5,000,000 = $350,000 a year, payable before any common dividend; if skipped for two years, $700,000 accumulates.
The company then issues 1,000,000 new common shares at $8.00 to fund an acquisition: capital stock rises by $100,000 to $500,000; additional paid-in capital by $7,900,000 to $15,500,000; shares outstanding to 4,800,000. Authorised but unissued common shares remain: 10,000,000 minus 5,000,000 issued = 5,000,000.
Net income of $3,000,000: earnings per common share = ($3,000,000 minus $350,000) / 4,800,000 = $0.55, against $0.70 before the issue on 3,800,000 shares; the acquisition must add more than $550,000 to earnings for the issue not to dilute.Case study
Seen in the real world.
A founder-led software company raised three rounds of investment over six years, each with a different class of preferred stock carrying liquidation preferences, conversion rights and anti-dilution protection. By the third round the capital stock section of its balance sheet listed Series A, B and C preferred plus common stock, and nobody in the company except the lawyers understood who would receive what if the company were sold. When an acquirer offered $60,000,000, the finance director built a waterfall: Series C had a 1.5 times preference on $20,000,000 ($30,000,000 first); Series B a 1 times preference on $8,000,000; Series A a 1 times preference on $3,000,000; the remaining $19,000,000 was shared among all holders on conversion, with the common stock (founders and employees, 45% of the fully diluted shares) receiving $8,550,000.
The founders had believed a $60,000,000 sale would make them wealthy; the capital stock terms meant it made them comfortable. The company declined the offer, grew for two more years, and sold for $140,000,000, at which the preferences were a smaller share and the common received $58,000,000. The finance director's contribution to the next company he joined was a capitalisation table with a waterfall at several exit values, updated after every issue and shown to the board, so that the meaning of the capital stock was never again a surprise.
Watch out
Common mistakes.
- Reading capital stock at par as the value of the shareholders' investment. Par is nominal; the investment is par plus additional paid-in capital, and the value is the market price.
- Overlooking preferred stock terms (cumulative dividends, liquidation preferences, conversion) when assessing what common shareholders own.
- Confusing authorised, issued and outstanding shares, particularly when calculating per-share figures, which must use outstanding shares.
Questions
People also ask.
What is the difference between capital stock and share capital?
None in substance. Capital stock is the US term, share capital the UK and IFRS term.
Does capital stock have to be repaid?
No. It is permanent capital, returned to shareholders only through buybacks, redemption of redeemable shares, or distribution on liquidation after creditors are paid.
Why do companies have par value at all?
Historically to set a minimum issue price and a capital maintenance floor for creditors. Many jurisdictions now permit no-par shares, and par values are often set at trivial amounts.
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