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Also known as equity financing, share capital is the term used to describe funds that are generated by issuing shares of stock as a means of raising cash for the issuer. Over time, the amount of share capital raised by a given company will change, since that amount is subject to change each time new shares are made available to current and prospective investors. Share capital can be composed of any type of shares issued by the company, including preferred and common stock shares.
The term share capital as a means of identifying the funds raised from a stock offering is commonly used in the United Kingdom, along with the term issued capital. In the United States, this type of income may be known as either share capital or capital stock. While this capital is most often received in the form of cash, it is also possible to accept other means of payment, such as equipment that is manufactured by the investor. There are even instances where share capital is generated by trading the issued shares with shares of stock that are issued or in the possession of the investor, accepting those stocks as payment, based on their current market value.
Share capital is created as the result of an initial public offering and any public offerings that may occur at some point in the future. Any type of shares that are sold or assigned are included in this figure, including common or preferred shares that may be issued to employees as part of their overall benefit package. Capital reduction occurs when these shares are repurchased at prices higher than what investors paid for the shares originally. Once in hand, share capital can be used to fund any project that the company desires, including the construction of new facilities, the launch of a new product, or some other project that is likely to increase the value of the business and enhance shareholders’ equity in the business.
It is important to note that share capital focuses on the price per share at the time the shares were purchased by investors. This means that if a business raises a total of $5 million US dollars (USD) from a stock offering, and those same shares increase in value to $8 million USD after a year or so, the company still only lists the amount of capital received at $5 million USD. Increases or decreases in the value of the shares do not affect the amount of capital that the company posts when the shareholder resells the acquired shares at a later date.