What are Capital Shares?

Key Highlights

• A dual-purpose fund offers a capital share class.

• Investors can purchase income shares for dividends or capital shares for profits in a dual-purpose fund.

• These stocks can be classified as "prolonged risk," and it is necessary to diversify these shares by offering more modest, lower volatility products.

Understanding Capital Stock Meaning

A company's capital stock is a term used to describe its ownership. In the case of company share ownership, this is also another term. The number of equity and preference shares a company is authorized to issue in accordance with the Articles of Association shall be defined as capital stock. The balance sheet of the company under owners' equity shall show the amount of capital stock. It should be noted that only a company may issue shares of capital.

The maximum number of shares that can be held at any one time is included in the capital stock. This does not compare to the total number of shares held by the company. The authorized share capital of a company that is legally issued to the public is also known as the capital stock. On the other hand, those shares issued and currently retained are referred to as outstanding shares. As a consequence, the remaining shares are part of the authorized share capital.

How are Capital Stocks Allocated?

The maximum number of shares that are issued will be approved by the company's Board of Directors. The shares may be equity or preference shares. Subject to the authorized share capital, the company may distribute shares over a while. It incurs high legal costs to authorize a number of shares. Therefore, it is proven to be cost-efficient for shareholders to authorize a lot of shares that can be sold over time.

Preference shares are also included in the capital stock. Preference shareholders, on the other hand, are paid dividends before equity holders. In some cases, the dividends for preference shares are fixed. Furthermore, at the time of liquidation, preference shareholders will be treated more favorably than equity holders.

If inflation rises, as the dividend paid to preference shareholders is fixed, whereas the dividend paid to equity shareholders is dependent on the financial performance of the company, the preference shares may lose value.

Types of Capital Stock

There are the following types that can be divided.

1. Authorized

The maximum number of shares a company may issue, as set out in its legal charter, is the authorized capital stock. After following the prescribed procedures, it may be amended by means of a change in its legal name.

2. Issued

This is the total number of shares now issued by a company from its authorized share capital. It's worth noting that the issue of capital is not permitted to exceed the authorized amount.

3. Unissued

This reflects a portion of the authorized capital stock that is still not issued by the company.

4. Outstanding

It means those shares not acquired by the company and which are still owned by shareholders, such as those held by stockholders.

5. Treasury share

It means that the company repurchased those issued shares.

Advantages of Capital Stock

The benefits of capital stock are as follows.

1. Raising capital for the company without recourse to debt is the primary purpose of the capital stock. Therefore, the fixed cost of the company does not increase with the capital stock.

2. It is commonly used for capital raising and the expansion of the business. Alternatively, rather than purchasing assets such as land, plant machinery, etc., a company may issue shares. In addition to capital appreciation, investors also buy capital shares in a company for dividends.

3. In contrast, the issuance of capital stock can result in the corporation taking control or management of the business and reducing the value of its outstanding shares.

How to Calculate the Value of Capital Stock?

If you want to calculate the value of an authorized share issued by a company, follow these steps.

1. Calculate the number of shares that were issued.

For the purpose of raising funds, a company may issue ordinary and preferred shares. In each type, indicate how many shares have been issued. The balance sheet of the company provides this information.

2. Note the value of the par

Par value is the amount of stock valuation that a company has determined for its share price. This is the minimum amount that can be bought by an investor in a company's stock. A number of companies can decide to issue their shares with no par value. The stock certificate contains this information.

3. Determine the value of the shares

The formula for determining the value of the issued shares is given below.

Capital stock = the number of shares issued x par value per share

Conclusion

A dual-purpose fund offers capital shares, in which investors can allocate their funds between shares for profits and income stocks for dividends. However, as compared to the ease and low costs of investing in growth strategy ETFs, these types of funds have become less attractive over time. These strategies are very aggressive and should, therefore, be regarded as attacking parts of an investor's investment portfolio, where they are usually balanced between securities with a lower risk profile.