A corporation acquires capital
by issuing shares of stock to investors (capital stock). The capital that
a corporation raises by issuing stock is referred to as contributed
capital. Stock represents a person’s ownership interest in a
corporation. Transfer of ownership in a corporation is accomplished by
selling shares of stock.
• Authorized Shares: A
corporation must state the number of shares authorized to be issued in its
articles of incorporation. There is no limit to the number of shares a
corporation may authorize, and there is no minimum number of shares that
actually must be issued. A corporation should authorize more shares than
it plans to issue in case additional capital has to be raised in the
future. A corporation can amend its articles of incorporation to authorize
more shares, if necessary.
• Capital Stock Outstanding: Shares
issued and held by shareholders. The capital contributed to the
corporation in exchange for these shares equals the amount of capital
stock listed on the corporation balance sheet (Schedule L, Form 1120).
• Common Stock: Common
stock generally carries voting power for purposes of electing directors
and controlling management of a corporation. Dividends on common stock are
generally based on corporate profit rather than a stated amount, which can
mean high returns in years when corporate profit is high. However, the
rights associated with common stock are usually subordinate to those of
preferred stock with regard to dividends and proceeds from corporate
liquidation.
—Nonvoting Common Stock: Some states allow corporations to
issue nonvoting common stock. The shareholder receives the financial
benefits attributed to ownership, but without the voting power to control
the corporation.
• Debt Securities: A
debt security is a bond or other debt instrument secured by the general
credit of the issuing corporation. The bond usually carries a fixed rate
of return that is not dependent on the success of the corporation. Issuing
debt securities is a means for a corporation to raise capital without
surrendering control or ownership, since the bond holder does not have
voting rights or rights to corporation earnings or profits.
• Market Value of Stock: Market
value of stock is the price for which it is bought and sold on an open
market, such as the New York Stock Exchange. Trading in an open market has
no effect on the corporation balance sheet, except when the corporation
issues new shares to stockholders or repurchases some of its own stock
from shareholders.
• Par Value: Par
value is an arbitrary dollar amount assigned to shares of stock for
accounting purposes, and is usually printed on the stock certificate. Par
value has very little financial importance since the price of shares will
vary depending on market value. Stocks may be issued with no par value.
• Preferred Stock: Holders
of preferred stock generally have preferential rights to dividends and
proceeds from corporate liquidation, as compared with owners of common
stock. However, dividend and liquidation proceeds from preferred stock are
generally limited to a specified amount, and the stock usually does not
carry voting rights. Corporations will often issue preferred stock as a
means of raising capital without giving away control.
• Stated Value: An
arbitrary amount assigned to stock with no par value, used for accounting
purposes.
• Treasury Stock: When
a corporation reacquires its own capital stock, the reacquired stock is
referred to as "treasury stock." Treasury stock does not have
voting privileges or rights to dividends. In some states the concept of
treasury stock has been eliminated, in which case the reacquired stock is
considered unissued. The stock is then available for reissue to investors.
