What is Ordinary Shares Capital?
The ordinary shares capital is defined as the overall value of money that the business has acquired through the common stock issue when the business went public. It includes the money that has been raised from the private investors. The amount is parked under the liability side of the balance sheet for the business.
The ordinary share capital is an account present in the stock holders equity. The money has been raised through the issue of shares through public sources and private sources. This can be regarded as the business’s amount from the owners in the exchange of the common equity shares or stocks. The ordinary share capital is generally updated in proportion to the number of holdings held by the business in the form of equity. The ordinary share capital is regarded as the amount that the business may raise to finance small projects and business requirements.
Ordinary capital is cheaper with respect to the debt counter part as the source of finance. The business does not have to pay or obligated to pay interest back to the shareholders. The holders of the ordinary share capital generally receive dividends in proportion to their stock ownership whenever the business performs well and generate profits for itself in a given financial year.
However, if the business fails to meet targets and generate revenues for itself, then the business may not pay any dividends to the owners of the ordinary shareholders. Normally Ordinary share capital is represented in terms of the product of the issue price of the share and the number of shares issued by the business. The following would be the mathematical relationship: –
Value of Ordinary Share = Issue Price of The Share * Outstanding Number of Shares
The issue price is generally in the form of book value or the face value of the ordinary shares that are accessible to the public. The overall outstanding shares are the number of shares that the business has issued in the public market to raise additional finance and available to the public for trading purposes. Additionally, the business has to issue ordinary shares in accordance to business laws and as per the articles of association. The issue price of the shares is generally arrived at by taking market forces and sentiments into account. The issue price is also determined by underwriters as employed by the business for facilitating the issuance of shares.
Examples of Ordinary Shares Capital
Let us take up the case of ABC company. The business went to the financial market to raise finance from the public having an issue size of $400,000. It plans to offer the shares to the public at $20 per share. The business holds a good reputation and generally regarded as a top-notch brand. When the business went public, it was able to get its shares fully subscribed. Help the management to determine the number of shares they issued from such a process.
The number of Shares Issued is calculated as
Number of Shares Issued = Issue Size / Price per Share
- Number of Shares Issued
- = $400,000 / $20
- Number of Shares Issued =20,000
Hence, the business was able to issue 20,000 and raise ordinary share capital for its business worth $400,000.
Ordinary Shares Capital in Balance Sheet
The ordinary shares capital generally comes in the liability section of the balance sheet of the business. Under the liability section, it would be reported under the stockholder equity component of the liability section of the balance sheet. Basis the nature of the issue or buy back of the ordinary shares, the starting and ending balance of the stock holder equity is maintained for each passing financial year.
Advantages of Ordinary Shares Capital
Some of the advantages are given below:
- As is the case with debt financing, the business is not obliged to make any interest payments to the holder of the stocks or shares. The process of getting finance from the public market in terms of ordinary shares is fairly simple and flexible.
- The business has the full authority in terms of deciding the issue size of the ordinary capital and the price of the shares to be issued, and the probable time of issuance. The business always has the option of raising additional finance in the form of ordinary share capital.
- The business always has the capability to easily initiate the buy back of the ordinary shares. The creation of ordinary share capital allows business to make management and ownership separate.
- The business can’t be pushed to bankruptcy by the owners of the shares in the event if the business fails to meet or pay back the shareholders.
- If the business grows in size and is sold off to the other stakeholders, the investors benefit from the appreciated amount they receive, which is generally over and above their value of the investment.
Disadvantages of Ordinary Shares Capital
Some of the disadvantages are given below:
- The business generally loses out over the business’s authority and controllership whenever it raises finance through the issuance of ordinary shares. The business may find itself in a difficult position to get even ordinary resolutions to pass if the ownership of the share rests with unsupportive shareholders.
- The unsupportive shareholders also would then have the authority to change the management entirely and induct or hire new management in its place.
- If the business fails to perform a proper valuation of its assets, then the business can get money from the shareholders at an inferior issue price, and this raises the risk of making the business highly undervalued.
The ordinary share capital is defined as the lumpsum amount raised by the business from the public or the financial market to finance any new projects in pipelines or meet the business requirements. As compared with debt financing, the business is not obligated to make any interest payments on the money raised from the issue of ordinary shares. Rather they are entitled to receive dividends only when the business performs as per the target expectations.
This is a guide to Ordinary Shares Capital. Here we also discuss the introduction and examples of ordinary shares capital along with advantages and disadvantages. You may also have a look at the following articles to learn more –