When a company needs to raise capital to fund its development or growth, there are two ways in which it can go about getting the money it needs – through debt, which is either corporate bonds or a bank loan, or by equity financing, which involves issuing small shares of a company in return for capital.
In equity financing, issued share capital is the total amount of money the company generates by selling of stocks to investors.
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Understanding share capital
Simply put, share capital is the dollar amount of the shares that a company issues. Share capital is the main way companies go about equity financing their operations and investments, and this can happen through the sale of common shares or preferred ones.
For example, suppose a company IPOs 100 shares in the public market at ₹500 per share. The share capital value would equal = 100 shares x ₹500 per share = ₹50,000.
It is worth noting that the share capital is relevant to a company only when it first sells to public markets because this is when the company generates money. If the shareholder goes on to sell this share to a third party after buying it from the company, the value isn’t accounted for under share capital.
Issued share capital
It is the share capital of issued shares of a company. Issued shares are the ones that are sold to or are already held by company investors.
Sometimes, however, even though an institution might have bought company shares on paper, they don’t pay the capital upfront. This partially paid capital is known as called-up share capital. The amount already received is called paid-up share capital.
Difference between issued shared capital and market cap
While they may sound similar in some respects as they are related concepts, they are not the same thing.
Issued share capital refers to the total value of a company’s shares that have been issued and are held by shareholders. When a company is formed, it issues shares to raise capital, representing ownership in the company. It is essentially the total value of shares that are in the hands of shareholders, whether they are individual investors, institutions, or insiders.
Market capitalisation, on the other hand, is the total market value of a company’s outstanding shares of stock. It is calculated by multiplying the current market price per share by the total number of outstanding shares. Market cap is also a measure of the public market’s perception of a company’s value.
Difference between issued shares and outstanding shares
When talking about issued shares and outstanding shares, there is often conceptual confusion. Note that issued shares are the shares that the company has issued to shareholders, including both those held by the public and those held by insiders such as company executives and employees.
When a company is formed, it issues certain shares as specified in its corporate documents. These shares represent ownership in the company, and they can be sold to investors or retained by the founders and employees.
Outstanding shares, on the other hand, refer to the total number of shares that are currently held by investors (both public and private), or that are being traded in the open markets. It excludes any shares that the company has repurchased (treasury shares) or that are held by insiders but have not been sold to the public.
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At some point, every company needs to raise capital by selling off equity. This means that stocks are a fundamental requirement for every business, and the capital they accrue from selling these stocks is incredibly important, too.
Concluding and recapping the above information: shares that have been sold to and are being held by investors are known as used shares. These may be large investors or even individual retail investors. The monetary amount that the company receives by issuing these shares is called issued share capital. And that’s about it!