Definition
The term capital stock is used to describe the authorized and issued transferable units of ownership in a corporation. Capital stock can include both common as well as preferred securities. The value of all capital stock issued can be found on the company's balance sheet.
Explanation
Companies can raise funds in two ways. They can borrow money from creditors, thereby increasing the liabilities of the business. Alternatively, they can raise cash by issuing shares of common or preferred stock, thereby increasing owner's equity.
The value of capital stock appearing on the balance sheet allows investors to understand the amount of funds raised through the issuing of stocks. It is also considered a permanent investment in the corporation, and cannot be withdrawn by shareholders. This feature provides creditors with some protection.
Generally, the owner's equity section of the balance sheet will contain at least two line items that relate to equity holders:
Capital Stock: the original dollar value of the investment by stockholders.
Retained Earnings: the earned capital not returned to shareholders in the form of dividends.
Companies have the option of repurchasing stock as well as issuing additional shares. Rapidly growing companies will issue capital stock to help fund additional investments in assets. Poorly performing businesses may also issue stock to help pay debts coming due.
Companies will sometimes repurchase shares as an alternative to issuing dividends. In doing so, they reduce the total number of shares outstanding. If the company can maintain profits, repurchasing of stock will effectively increase earnings per share.
Related Terms
Also known as a statement of financial position, the balance sheet is used to show the financial health of a company at a particular point in time. The balance sheet consists of assets, liabilities, and owner's equity in the company. It is one of the four key financial statements issued by public companies.
Moneyzine EditorJanuary 8th, 2024- The financial accounting term owner's equity is used to describe the resources that are owned by the common and preferred stock shareholders of a company. Owner's equity is reported on a company's balance sheet.Moneyzine EditorSeptember 20th, 2023
- The financial accounting term retained earnings is used to describe the portion of net income that is not distributed to common or preferred stockholders in the form of dividends, and is held by the company for future use. Retained earnings appear in the owner's equity section of the company's balance sheet.Moneyzine EditorSeptember 21st, 2023
- The financial accounting term preferred stock refers to a class of equities issued by corporations that contains special preferences, or features, that are not present in common stock. Preferred stock dividends are typically paid before those of common stocks; however, they usually don't have the voting rights common shareholders enjoy.Moneyzine EditorSeptember 21st, 2023
The financial accounting term additional paid-in capital refers to the amount paid in excess of par value by investors when capital stock is first issued. There are a number of subsequent transactions that can also affect the balance of this account. Additional paid-in capital appears in the owner's equity section of the company's balance sheet.Moneyzine EditorJanuary 4th, 2024
The terms Class A and Class B stock refer to common or preferred shares issued by the same corporation that offer their holders different rights. For example, each class of stock might differ with respect to the shareholders' voting rights or the payment of dividends.Moneyzine EditorJanuary 11th, 2024
