Share Capital
BeginnerShare capital is the money a company has raised by issuing shares to its owners. It forms part of shareholders' equity on the balance sheet.
When a company is formed or later raises money, investors buy shares and pay cash to the company. That cash becomes share capital, which represents the owners' direct investment in the business.
In many countries, share capital is split into two parts. Each share has a nominal or par value, which is often very small, such as 0.01 or 1. Any amount paid above that value is recorded separately as share premium or additional paid-in capital. For example, if a company issues 1 million shares with a nominal value of 1 at a price of 5 each, it records 1 million of share capital and 4 million of share premium.
Share capital is different from retained earnings. Share capital comes from owners putting money in; retained earnings come from profits the business has earned and kept.
Share capital is permanent financing: the company does not have to repay it. In return, shareholders own part of the company, may receive dividends and usually have voting rights. When a company buys back its own shares, the amount of equity on its balance sheet falls.
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