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Share capital is the total nominal value of shares issued by a limited company, representing the initial funding received from shareholders. It is a key indicator of a company's financial foundation, distinct from its market value, and is recorded in the equity section of the balance sheet. Understanding share capital is crucial for investors, founders, and anyone involved in corporate finance.
Share capital refers to the money a limited company raises by selling its shares. These shares represent units of ownership. When a company is formed, it typically issues a set number of shares at a fixed nominal value (e.g., 100 shares at $1 each), making the initial share capital $100. This nominal value is the base price of a share, as stated in the company's constitutional documents. It's important to distinguish this from market value, which is the price someone is willing to pay for the share based on the company's performance and potential. Shareholders' liability is generally limited to the amount they invested, which is the nominal value of their shares.
You can locate a company's share capital on its balance sheet under the ‘Equity’ or ‘Capital and Reserves’ section. This entry shows the total nominal value of all shares issued. If a company sells shares for more than their nominal value—for instance, a $1 nominal share sells for $5—the extra $4 is recorded separately as a share premium in a ‘share premium account’. This account is part of the company's non-distributable reserves, meaning it cannot be used for dividend payments.
Limited companies can issue various share types to attract different kinds of investors. Each type carries specific rights concerning voting and dividends. The most common types are outlined in the table below.
| Share Type | Voting Rights | Dividend Priority | Key Characteristics |
|---|---|---|---|
| Ordinary Shares | Yes | Last | Most common type; entitled to dividends and voting rights. |
| Non-Voting Ordinary Shares | No | Last | Same as ordinary shares but without voting rights; often used for employee share schemes. |
| Preference Shares | Typically No | Before Ordinary | Receives a fixed dividend before any payment to ordinary shareholders. |
| Cumulative Preference Shares | Typically No | Before Ordinary | Unpaid dividends accumulate and must be paid in future years before ordinary dividends. |
| Redeemable Shares | Varies | Varies | Can be bought back by the company at a future date or under specific conditions. |
The difference is fundamental to assessing a company's true worth. Share capital is a historical figure showing the money initially raised. Market value (or market capitalization) is a dynamic figure calculated by multiplying the current share price by the total number of shares. A successful company's market value will often be significantly higher than its share capital. For example, a company with a share capital of $10,000 could have a market value of $1 million based on its success and growth prospects.
Issuing new shares is a common way to raise capital for growth. Based on standard corporate procedures, the process generally involves these steps:
In summary, a clear grasp of share capital is essential for sound corporate decision-making.
