What is share capital?
Companies raise money through various methods to fund their operations and growth, and one key way they do this is by issuing shares. Share capital is the money a company collects from selling these shares to investors. Essentially, it represents the ownership stakes that shareholders have in the company. This capital is crucial for a company’s financial health, helping to finance new projects, expand operations, or improve infrastructure.
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Example of share capital
Let’s look at NVIDIA share (NVDA) as an example so as to understand this concept better. NVIDIA is a well-known technology company that makes graphics cards and other tech products.
When NVIDIA needs to raise money, it can issue new shares of its stock. For example, when NVIDIA first became a public company in 1999, it sold shares to investors through an initial public offering (IPO). The money from this IPO became part of NVIDIA’s share capital.
Later, if NVIDIA wants to raise more money, it might issue additional shares. For instance, if NVIDIA decides to expand its business or invest in new technologies, it might sell more shares to investors. The money from these new shares is added to its share capital.
NVIDIA's share capital is reported in its financial statements, showing how much money it has raised through issuing shares. This is broken down into common stock and possibly preferred stock, each with its own value. Common stock usually has a nominal value (like $0.01 per share), and any extra money received above this value is listed as "additional paid-in capital."
By understanding NVIDIA’s share capital, investors can see how the company funds its operations and growth. It’s a clear way to see how much money the company has raised from shareholders to support its business activities.
Types of share capital
- Authorized share capital: This is the total amount of money a company is allowed to raise by selling shares, according to its official documents. Think of it as a company’s maximum limit on how many shares it can issue. For example, if a company’s authorized share capital is set at $10 million, it means the company can sell shares worth up to $10 million. It’s like having a maximum spending limit on a gift card.
- Issued share capital: This is the amount of money a company has actually raised by selling its shares. It’s a part of the authorized share capital. For instance, if the company with a $10 million limit has sold shares worth $4 million, then the issued share capital is $4 million. This money is used by the company for its activities and growth. It’s like using some of the gift card’s value to make purchases.
Is share capital the same as equity?
Share capital and equity are related but not the same thing. Share capital as we’ve seen is the money a company raises by selling shares, like common stock or preferred stock. It’s a specific part of a company’s total equity. Think of it as the funds the company has gathered directly from shareholders by issuing stock.
Equity, on the other hand, is a broader term. It represents the total value of ownership in the company and includes share capital plus other elements. Equity also accounts for retained earnings (profits kept in the company) and other reserves or adjustments.
So, while share capital is a component of equity, it doesn’t cover everything. For example, if a company has earned profits and kept them instead of distributing them as dividends, these retained earnings add to the company’s total equity but are not part of the share capital.
In summary, share capital is the money from issuing shares, while equity includes share capital plus other financial elements that reflect the overall value of the company’s ownership.
Conclusion
While share capital is crucial for understanding how a company raises funds through the sale of shares, it's also important to recognize that it is just one part of a company’s overall equity. Share capital represents the direct investment from shareholders, but equity encompasses additional elements such as retained earnings and other financial reserves. Together, these components provide a complete picture of a company’s financial health and ownership structure. Source: investopedia.com
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