Ordinary Share Capital Definition

Ordinary share capital is the sum of money raised by a corporation from private and public sources through the issue of its common shares. It is the capital that is received by the owners of the company in exchange for shares. The ordinary share capital has equity ownership in the company in proportion to their holdings. Ordinary Shares Capital is one of the primary ways to finance various projects and purposes. It is usually considered better than debt methods like loans etc.

Ordinary Shares Capital Formula

The formula for ordinary shares capital as per below:

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where,

  • The issue price of the share is the face value of the share at which it is available to the public.The number of outstanding sharesOutstanding SharesOutstanding shares are the stocks available with the company’s shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner’s equity in the liability side of the company’s balance sheet.read more is the number of shares available to raise the required amount of capital.

Examples of Ordinary Shares Capital

Let’s see some examples of ordinary shares capital to understand it better.

Example #1

Suppose ABC is a US-based company. If the company sells 1000 shares, having a face value of $ 1 per share.

Solution:

Calculation of ordinary shares capital can be done as follows –

Issued share capital= $(1000*1)

Issued Share Capital = $1000 of ABC

Example #2

Suppose XYZ is a US-based company with an authorized capital of 1 million shares at a par value of $1 each, for a total of $1 million. However, the issued capital of the company is only 100,000 shares, leaving 900,000 in the company’s treasury available for future issuance.

Issued share capital= $(100,000*1)

Issued Share Capital = $100,000 of XYZ

Example #3

Let’s assume PQR is a UK based company. Its shareholder owns 50 shares at £1 each. Then these shareholders have to pay the company £50.

Issued share capital = (50*1)

Issued Share Capital = 50 of PQR.

Advantages of Ordinary Shares Capital

  • In the case of ordinary share capital, the company does not have to bother to repay for the initial investment or interest payments, unlike debt financing.Raising capital through shares is very flexible as the company decides the number of shares to issue, initial charge for them, if any, and time to issue them. It can be issued further also in the future as per the requirement of money. If desired, the company can buyback issued sharesBuyback Issued SharesShare buyback refers to the repurchase of the company’s own outstanding shares from the open market using the accumulated funds of the company to decrease the outstanding shares in the company’s balance sheet. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the company.read more.Someone has to be the owner of the company. Shareholders take ownership of the company.There is less risk that the company will turn bankrupt. Unlike creditors, Shareholders cannot force a company into bankruptcy if it fails to make payments.They are entitled to receive dividends after it is paid to preference shareholders. During winding up of business, they are entitled to their share of the company’s residual economic value but after bondholders and preferred shareholdersPreferred ShareholdersA preferred share is a share that enjoys priority in receiving dividends compared to common stock. The dividend rate can be fixed or floating depending upon the terms of the issue. Also, preferred stockholders generally do not enjoy voting rights. However, their claims are discharged before the shares of common stockholders at the time of liquidation.read more.The ordinary shareholders are benefited the most in case startups are sold to big companies. Hence the share capital is impacted positively.

Disadvantages of Ordinary Shares Capital

  • The major obligation that an ordinary shareholder faces is the price of the share he has to pay to the company.The share price fluctuates a lot, which short-term oriented investors find disappointing.Some companies are not so worthy of being part of as shareholders, but due to dishonest auditor may not show it properly. The share capital has to keep a check on shares analysis.A company can raise capital through the issue of shares. Still, then it reduces control and ownership over the company because every share depicts ownership in the company, and hence it passes to the shareholderIt Passes To The ShareholderA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company’s total shares.read more.If ordinary shareholders have a major proportion in the company, they can even remove the current leaders to bring new management. They can disapprove of the way of doing things.In case of a takeover, the competitor can acquire major voting sharesVoting SharesVoting Shares are the shares that authorize the shareholder to vote on Company issues like modifying its corporate policies or selecting Board of Directors etc. read more, and thus it can turn to a hostile takeoverHostile TakeoverA hostile takeover is a process where a company acquires another company against the will of its management.read more.In the case of raising capital by shares, a company can lose more shares at a low price to compensate for the risk of raising capital.While issuing further sharesIssuing Further SharesShares Issued refers to the number of shares distributed by a company to its shareholders, who range from the general public and insiders to institutional investors. They are recorded as owner’s equity on the Company’s balance sheet.read more, it impacts share value that has already been sold. Share price drops, and hence the dividend per shareDividend Per ShareDividends per share are calculated by dividing the total amount of dividends paid out by the company over a year by the total number of average shares held.read more also drops. It can upset current shareholders. In a worse situation, they can even use their voting power against management.

Limitations of Ordinary Shares Capital

  • An additional cost is always incurred while raising capital for the company through the issue of shares. In comparison to this, in debt financing, interest paid is usually deducted from its taxes.Arrangement of organizing a public share offering includes so much cost implication. The company has to prepare an IPOIPOAn initial public offering (IPO) occurs when a private company makes its shares available to the general public for the first time. IPO is a means of raising capital for companies by allowing them to trade their shares on the stock exchange.read more prospectus for the public invitation so that they can buy shares.Shareholders will have to be updated by the company about its performance and other relevant matters from time to time. Hence, raising capital through the issue of shares includes a time implication.In the initial phases, the main focus of the business may deviate from the main business. Many documents and formalities are required, like the prospectus and other related documents. Not only this, an essential task like organizing advertisements for the sale of shares, and arranging for the implementation of the shares being issued are also to be done.

Important Points

  • As it is a major source of financing incorporation, Ordinary shares must be part of the stock of all companies.Ordinary shareholders are generally considered unsecured creditors. They face greater economic riskEconomic RiskEconomic Risk is the risk exposure of an investment made domestically or abroad. These risks could be macroeconomic factors like government policies or collapse of the current government and major swing in the exchange rates.read more than creditors and preferred shareholders of a company.Ordinary sharesOrdinary SharesOrdinary Shares are the shares that are issued by the company for the purpose of raising the funds from the public and the private sources for its working. Such shares carry voting rights and are shown under owner’s equity in the liability side of the balance sheet of the company.read more rank after preference shares for dividends and returns of capital but carry voting rights.

Conclusion

We can conclude that there are many possible ways to raise capital. Out of this, the company can raise capital by issue of shares to the public. It can be more suitable and appropriate as compared to other methods. But, sometimes, it raises further issues for the company. So, proper care must be taken as Ordinary Share capital is the capital generated from ordinary shares issued to the public at large, and the company’s reputation is at stake.

It has been a guide to what is Ordinary Shares Capital and its definition. Here we discuss the ordinary share capital formula along with its calculation, practical examples, and explanation. We also discuss its advantages, disadvantages & limitations. You may learn more about accounting from the following articles –

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