Updated July 14, 2023
What is Ordinary Shares Capital?
The ordinary shares capital defines as the overall value of money that the business acquires through the common stock issue when the business goes public. It includes the money that has been raised from the private investors. The amount is parked under the liability side of the balance sheet for the business.
Explanation
The ordinary share capital is an account present in the stockholder’s equity. The money raises through the issue of shares through public and private sources. This can be the business’s amount from the owners in the exchange of common equity shares or stocks. The ordinary share capital is generally updated in proportion to the number of holdings the business holds in the form of equity. The ordinary share capital is the amount the business may raise to finance small projects and business requirements.
Ordinary capital is cheaper with respect to the debt counterpart as the source of finance. The business does not have to pay or obligates to pay interest back to the shareholders. The holders of the ordinary share capital generally receive dividends in proportion to their stock ownership whenever the business performs well and generate profits for itself in a given financial year.
However, if the business fails to meet targets and generate revenues for itself, then it may not pay any dividends to the owners of the ordinary shareholders. Normally Ordinary share capital represents terms of the product of the issue price of the share and the number of shares issued by the business. The following would be the mathematical relationship: –
The issue price is generally in book value or the face value of ordinary shares accessible to the public. The overall outstanding shares are the number of shares the business has issued in the public market to raise additional finance and are available for trading purposes. Additionally, the business has to issue ordinary shares per business laws and the articles of association. The issue price of the shares generally arrives at by considering market forces and sentiments. The issue price is also determined by underwriters as employed by the business for facilitating the issuance of shares.
Examples of Ordinary Shares Capital
Let us take up the case of ABC company. The business went to the financial market to raise finance from the public with an issue of $400,000. It plans to offer the shares to the public at $20 per share. The business holds a good reputation and is generally regarded as a top-notch brand. When the business went public, it was able to get its shares fully subscribed. Help the management to determine the number of shares they issued from such a process.
The number of Shares Issued calculates as
- Number of Shares Issued
- = $400,000 / $20
- Number of Shares Issued =20,000
Hence, the business could issue 20,000 and raise ordinary share capital for its business worth $400,000.
Ordinary Shares Capital in Balance Sheet
The ordinary shares capital generally comes in the liability section of the business’s balance sheet. Under the liability section, it would report under the stockholder equity component of the liability section of the balance sheet. Basis the nature of the issue or buyback of the ordinary shares, the starting and ending balance of the stockholder equity is maintained for each passing financial year.
Advantages of Ordinary Shares Capital
Some of the advantages are as follows:
- As with debt financing, the business is not obliged to make any interest payments to the holder of the stocks or shares. Getting finance from the public market regarding ordinary shares is fairly simple and flexible.
- The business has full authority in deciding the issue size of the ordinary capital, the price of the shares to issue, and the probable time of issuance. Regular share capital is a constant source of extra funding for the company.
- The business can always initiate the buyback of ordinary shares easily. Creating ordinary share capital allows businesses to separate management and ownership.
- The business can’t push to bankruptcy by the owners of the shares if the business fails to meet or pay back the shareholders.
- Suppose the business grows and is sold off to the other stakeholders. In that case, the investors benefit from the appreciated amount they receive, generally over and above their investment value.
Disadvantages of Ordinary Shares Capital
Some of the disadvantages are as follows:
- The business generally loses out on the business’s authority and controllership whenever it raises finance through the issuance of ordinary shares. The business may find it difficult to get even ordinary resolutions to pass if the share ownership rests with unsupportive shareholders.
- The unsupportive shareholders would also have the authority to change the management entirely and induct or hire new management.
- Suppose the business fails to perform a proper valuation of its assets. In that case, the business can get money from the shareholders at an inferior issue price, and this raises the risk of making the business highly undervalued.
Conclusion
The ordinary share capital is defined as the lumpsum amount raised by the business from the public or the financial market to finance any new pipeline projects or meet the business requirements. Compared with debt financing, the business is not obligated to make any interest payments on the money raised from the issue of ordinary shares. Rather they are entitled to receive dividends only when the business performs as per the target expectations.
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This is a guide to Ordinary Shares Capital. Here we also discuss the introduction, examples of ordinary shares capital, and advantages and disadvantages. You may also have a look at the following articles to learn more –
