Capital Stock in economics its Types preferred share and calculation

Capital Stock

For small entities, equity capital is the owner’s contribution to the business , that is, the amount the owner has invested in the business. However, for large organizations, share capital is a part of the share capital that is obtained through the issuance of shares . It refers to the amount of cash financed by potential investors, who then, after investing, become partial owners of the business. In this article we will provide you the information about the concept of Capital Stock in economics.

The capital stock is divided into several shares at par value and each share represents the property. The funds raised through equity financing are generally used to expand the business. If you have to manage on a limited budget but are looking for a way to invest in the future of your business, exploring the benefits of equity could be a step towards finding a solution.

One of the reasons you may want to use equity capital instead of borrowing capital from financial institutions is that the money you might receive from investors does not require you to make regular repayments to an investor . As such, you don’t have to worry about keeping up with a monthly payment plan or paying interest.

As an early stage company does not have the income to sustain itself, equity capital acts as a very important economic development factor. Thus, good management of social capital is vital to ensure the correct investment of resources -be it machinery, materials, first salaries, among others- and to plan the steps of the company in the short and medium term.

Social capital also ensures the ability of a new company to maintain itself for some time , being a guarantee for, for example, investors, employees and even for the company or an entrepreneur. In this way, the capital stock must be taken into account and defined a priori in your business plan. Once defined, the capital stock must be deposited in a bank (or the monetary part of it) during the incorporation of the company.

It is also possible to deposit the capital stock within five business days or until the end of the first financial year, however, all this must be stipulated during the incorporation of the company. In addition, share capital is an important indicator because it conditions the right to profit and the right to vote of each of the partners. Thus, another of its functions or purposes is the determination and limitation of the responsibilities of each partner of the company, as well as the control of each one over the business.

Types of social capital

There are two main types of equity capital:

  • Common actions
  • Preferred stock

What are preferred shares?

Preferred shareholders may or may not have voting rights. They receive fixed dividends, regardless of the company that makes a profit. In the case of liquidation, preferred shareholders have a greater share of net assets than ordinary shareholders.

In the case of liquidation, the ordinary shareholders have the last preference, that is, they receive their share of the liquidation profits after paying all the other stakeholders of the company.

Holders of preferred shares receive their dividends before common shareholders receive dividends. In exchange for this prioritization, preferred shareholders will normally never receive a payment higher than the established dividend. For example, a shareholder who owns 100 shares of 9% of the $ 100 par preferred shares of a company will receive an annual dividend of $ 900 and will receive it before the common shareholders receive their cash dividend payments for that company. anus. In most circumstances, the preferred shareholder will never be paid more than $ 9 per share, no matter how successful the business is.

Preferred stocks tend to lose value when the inflation rate increases. Since dividends paid on preferred shares generally remain at a fixed amount indefinitely, the market value of the shares generally moves in the opposite direction of inflation. If the inflation rate decreases, the value of the preferred shares may increase proportionally, but not higher than the purchase price of the share.

Advantage of Capital Stock in economics

In addition, when raising funds through the use of share capital, you are not subject to any restrictions or stipulations of use. As such, the money you could receive from investors could be used to support anything from key growth projects, innovation, research and development, or purchasing equipment to moving into new facilities. Therefore, how the funds are used in your business is entirely up to you, although investors may still want to know what your plans are and how you plan to make them happen.

Likewise, using equity capital also gives you full control of how much equity you are giving away in your business, the price of each share, and when they are awarded. If you need more money in the future, you can also continue to offer stocks. What this means is that you don’t have the freedom to give away more than you are comfortable with, and what you sell is made at a price that still works for your goals .

Finally, another advantage of using equity capital over traditional forms of lending is that it exposes your business to less risk. In addition to not having to make regular monthly repayments or pay interest, you and your investors have a strong interest in your business reaching a prosperous future.

So if they have enough experience in your sector, investors may decide to offer you advice or even get involved to help you make key decisions for your business. As such, equity capital could become a gateway to access the knowledge and expertise of seasoned industry professionals.

How to calculate the share capital?

Capital is the financial power of a company, the amount invested by shareholders when the business was still in the beginning of its activities . It is the fund raised by a publicly traded company by issuing ordinary shares (ordinary shares) and preferred shares (preferred shares).

When you hear that a company is worth a certain amount of money, know that part of that value is directly linked to capital stock.

For example, if you have a business that does not need physical space, inventory and only sells online, you can pay a low amount that will not affect your management. Depending on the growth of the business, the partners will be able to make new economic contributions that satisfy the new needs.

There are different types of capital stock to calculate such as the Authorized Social Capital , Issued Social Capital , etc. The authorized capital of a company is the maximum value of securities that a limited company can legally issue to its shareholders. The issued capital is the nominal value of the part of the capital stock that has been issued to the shareholders.

Calculation of Capital Stock in economics

Authorized capital = Number of shares allowed * nominal value

Issued capital = Number of shares actually issued * par value


A company issued 10,000 common shares ($ 1 par value each) at a subscription price of $ 6 per share, and 5,000 7% preferred shares ($ 0.50 par value) at a price of $ 5 per share. Later,

Issued share capital = 10,000 * $ 1 + 5,000 * $ 0.50 = $ 12,500

The face value is the minimum value that cannot be used to pay dividends to shareholders. This is a rule implemented by the government, to which companies responded by setting the face value of their common stock certificates to one penny or less. The face value is not the market value. The par value is arbitrary, a value assigned to stocks sold by corporations (for those that assign a value at all).

Rather, the market value is the real value of the price of a share on the open market. The share capital gains market value only after the shares that are issued to investors are sold to third parties on the open market.

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