What is Capital Stock?

Published by Thomas Herold in Accounting, Corporate Finance, Investments

'Capital Stock' is explained in detail and with examples in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

A business’ capital stock is the up front capital that the founders of the firm invest in or put into the company. This capital stock also proves useful as security for a business’ creditors. This is because capital stock may not be taken out of the business to disadvantage the creditors in question. Such stock is separate from a business’ assets or property that can rise and fall in value and amount.

A company’s capital stock is segregated into shares. The complete number of such shares have to be detailed when the business is founded. Based on the entire sum of money that is put into the company when it is started up, each share will possess a particular face value that must be declared.

This value is referred to as par value of the individual shares. These par values are the minimum sums of money that may be issued and sold in stock shares by the business. It is similarly the capital value representation in the business’ own accounting. In some countries, these shares do not contain any par value period. In this case, the capital stock shares would be termed non par value stock. Such shares literally represent a portion of an ownership in the business in question. These businesses may then declare various classes of shares. All of these could have their own privileges, rules, and share values.

The owning of such capital stock shares is proven by the possession of a certificate of stock. These stock certificates prove to be legal documents that detail the numbers of shares each shareholder owns. Other particular data of the capital stock shares, including class of shares and par value, is similarly detailed on these certificates.

These owners of the firm in question may decide that they need more capital in order to invest in additional projects that the company has in mind. Besides this, they might decide that they want to cash out some of their own holdings in order to release a portion of capital for their own private needs. They can do this by selling all or some of their capital stock to many partial owners. The ownership of one such share gives the share owner an ownership stake in the company. This includes such privileges as a tiny portion of any profits that may be paid out as dividends, as well as a small part of any decision making powers.

These shares sold from the capital stock each represent a single vote. The owners could decide to offer various classes of shares that could then have differing rights of voting. By owning a majority of the shares, the owners can out vote all of the little shareholders combined. This permits the original owners to maintain effective control of their company even after issuing shares of their capital stock to investors.

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The term 'Capital Stock' is included in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.