What Is Share Capital?

Identification

Share capital is money that a company raises by selling stock. This may be the initial public offering, or IPO, of the stock, or it may be future stock issues by the company. The money doesn't include any money that results from the fluctuations in the value of the stock after the sale of that stock. So, if the stock decreases in value after the company issues it, this isn't reflected in the share capital value on the company's financial statements.

Benefit

Share capital allows a company to expand its enterprises without borrowing money. The share capital gives the company funds it would otherwise have to borrow and on which it would have to pay interest. This interest may amount to more than the profits it would share with shareholders if the company pays dividends. If the company doesn't share profits with shareholders, then the issuance of stock and collection of capital represents interest-free money, which the company receives for its operations.

Disadvantage

Once the company issues stock, the only way to get it back is to repurchase it. Each time the company issues stock, it dilutes the shares for all shareholders. Because of this, the company must be careful how much it issues. If the stock's value drops in response to the issuance of more stock, then the company's future issues may not bring in the share capital needed by the company.

Consideration

Companies issuing stock to receive share capital must balance their decision to raise capital with the fact that ownership of the company is increasingly put into the hands of individuals outside of the company. The company's responsibility to the shareholders becomes more important, as profits mean that shareholders see an increase in the company's stock value. No profits or a failed business operation results in the company's share capital being wasted; future prospects for raising capital may be diminished.