Definition
Share Capital refers to the funds raised by a corporation through the issuance of shares in return for cash or other considerations. It is the total value of shares that a company can issue as stated in its memorandum of association. This constitutes the major source of long-term finance for the company and forms a significant part of the company’s equity.
Key Takeaways
- Share Capital refers to the funds that a company raises in exchange for issuing shares. These shares represent ownership in the company and can be of different types such as common shares or preferred shares.
- The amount of share capital a company has can change over time as it may decide to issue more shares to raise additional funds. However, the decision to issue more shares can dilute the ownership proportions of existing shareholders.
- Share Capital is a key aspect of a company’s corporate structure and financial health. It reveals part of the total value and financial resources of a business. However, it’s not the only financial indicator investors should consider when deciding about investment.
Importance
Share capital is an essential concept in finance as it represents the funds that a company raises through the issuance of shares in exchange for cash or other considerations.
It is considered the company’s primary source of funds, providing the backbone for its financial structure and being crucial for expansion and development.
Share Capital reflects the value of a business and influences the company’s ability to raise further capital, affecting growth potential and investors’ perception of the company’s health and creditworthiness.
In summary, the importance of share capital lies in its role in determining company value, enabling business growth, and defining stakeholders’ relationships.
Explanation
Share Capital, primarily, serves as a crucial source of funds for any corporation. It is the funding that a company raises through the issue of shares. Businesses utilize this capital to finance a multitude of operations such as development of new product, business expansion, and paying off debts, to name a few.
It forms the backbone of any corporation’s financial structure. The amount of share capital can fluctuate over time as the company may decide to release more shares for sale, or buy back existing shares. Share Capital holds significant importance as it also helps to determine the health and financial stability of a company.
Investors, credit rating agencies, and stockholders refer to it regularly before making important financial decisions related to a business. A company with a comparatively large share capital is often considered more reliable and financially stable, in turn, attracting higher investments. Thus, share capital acts as a major source of finance for a company, aiding its growth and survival in a competitive market.
Examples of Share Capital
Share capital, also known as equity financing, refers to the funds raised by a company by issuing shares of its capital to the public. This capital becomes the company’s primary source of funds. Here are three real-world examples:
**Facebook, Inc.**: In May 2012, Facebook offered its shares to the public in its Initial Public Offering (IPO) raising approximately $16 billion in one of the largest IPOs in the history of technology industry. This is an example of a company raising share capital.
**Alibaba Group**: The China-based multinational conglomerate specialized in e-commerce, retail, internet, and technology went public in the US in September
The company raised $25 billion in its IPO, which was the largest in the history of the New York Stock Exchange, exploring share capital as a means to generate funds.
**Tesla, Inc.**: In February 2020, the electric vehicle and clean energy company Tesla announced that it would raise $2 billion in a new share offering, with Elon Musk the CEO, buying up to $10 million in shares. This was another way for the company to generate share capital.
FAQs for Share Capital
What is Share Capital?
Share Capital refers to the funds that a company raises in exchange for issuing shares of itself. It is a major source of financing for companies, particularly startups and small businesses.
What are the different types of Share Capital?
The two main types of Share Capital are Authorized Share Capital and Issued Share Capital. Authorized Share Capital represents the maximum amount of shares a company is allowed to issue, as stipulated in its Articles of Association. Issued Share Capital, on the other hand, is the actual amount of shares a company has issued to shareholders.
What is the significance of Share Capital?
Share Capital plays a vital role in business financing. It helps a company generate funds without incurring debt. These funds can be used for various purposes like business expansion, settling liabilities, or even for bearing operating expenses.
What impacts the value of Share Capital?
Several factors can impact the value of Share Capital including financial performance of the company, economic conditions, market speculation and investor sentiment. Moreover, corporate actions like stock splits, issue of bonus shares, buyback of shares, etc. can also impact Share Capital.
How can I invest in Share Capital?
Investing in Share Capital involves purchasing shares of a company. This can be done through a brokerage account. Before investing, however, it is important to thoroughly research the company and consider factors like its financial health, business model, industry outlook, etc.
Related Entrepreneurship Terms
- Equity Financing
- Authorized Shares
- Issued Shares
- Shareholder’s Equity
- Par Value
Sources for More Information
- Investopedia: An comprehensive resource for learning about finance, including terms like share capital.
- Wall Street Mojo: Provides in-depth guides and resources on a variety of finance-related topics, including share capital.
- Corporate Finance Institute (CFI): Offers online finance courses and education resources, including topics on share capital.
- Accounting Tools: Offers a wide array of financial learning resources, explanations, and calculators, including details on share capital.
