How Do Share Capital and Paid-Up Capital Differ?

Companies issue shares of stock or equity for various reasons such as to fund expansion or pay down debt. Various terms are used regarding the process of issuing stock to raise capital. Fully understanding them can be key to your investment decisions.

Key Takeaways

• Share capital consists of all funds raised by a company in exchange for shares of either common or preferred stock.
• Authorized share capital is the maximum amount of share capital that a company is authorized to raise.
• Issued share capital is the total value of shares that a company elects to sell.
• Paid-up capital is the amount of money that a company has been paid from shareholders in exchange for shares of its stock.

Share Capital

Share capital consists of all funds raised by a company in exchange for shares of either common or preferred shares of stock. The amount of a company’s share capital or equity financing can change over time. A company that wants to raise more equity can obtain authorization to issue and sell additional shares, increasing its share capital.

Share capital is only generated by the initial sale of shares to investors. It doesn’t include shares that are sold in a secondary market after they’ve been issued.

Authorized Share Capital

Authorized share capital is the maximum amount of share capital that a company is authorized to raise. The limit is outlined in its constitutional documents and can only be changed with the approval of the shareholders. A publicly traded company must specify a limit to the amount of share capital that it’s authorized to raise before it can sell stock.

A company doesn’t usually issue the full amount of its authorized share capital. Some will be held in reserve for possible future use.

Issued Share Capital

Issued share capital is the total value of shares that a company elects to sell. A company may elect to only issue a portion of the total share capital with a plan to issue more shares at a later date. Not all these shares may sell right away and the par value of the issued capital can’t exceed the value of the authorized capital.

The total par value of the shares a company sells is referred to as its paid share capital. This is what most people refer to when they speak about share capital. Issued share capital is simply the monetary value of the portion of shares of stock that a company offers for sale to investors.

Paid-Up Capital

Paid-up capital is the amount of money that a company has been paid from shareholders in exchange for shares of its stock. A company may sometimes issue shares and not receive the full payment from the investor. This is usually the case with large institutional investors. The value of these shares is referred to as called-up share capital.

Paid-up capital is created when a company sells its shares on the primary market directly to investors. It’s important because it’s capital that’s not borrowed. A company that’s fully paid up has sold all available shares and therefore can’t increase its capital unless it borrows money by taking on debt. 

Paid-up capital can never exceed authorized share capital. The authorized share capital represents the upward bound on possible paid-up capital.

Characteristics of Paid-Up Capital

Paid-up capital doesn’t have to be repaid and this is a major benefit of funding business operations in this way. Also called paid-in capital, equity capital, or contributed capital, paid-up capital is simply the total amount of money shareholders have paid for shares at the initial issuance. It doesn’t include any amount that investors later pay to purchase shares on the open market.

Paid-up capital may come with costs. It’s most often referred to as equity capital in capital budgeting. The absence of required repayment is among equity’s main advantages in the debate over the relative benefits of debt versus equity. Shareholders expect a certain amount of return on their investments in the form of capital gains and dividends, however.

Important

The business isn’t required to return shareholder investment but the cost of equity capital can still be quite high.

Paid-up capital is listed under stockholder’s equity on the balance sheet. This category is further subdivided into common stock and additional paid-up capital sub-accounts. The price of a share of stock consists of two parts: the par value and the additional premium paid that’s above the par value. The total par value of all shares sold is entered under common stock. The remainder is assigned to the additional paid-up capital account.

Paid-up capital can be used in fundamental analysis. Companies that use large amounts of equity funding may carry lower amounts of debt than companies that don’t. A company with a debt-to- equity ratio that’s lower than the average for its industry may be a good candidate for investing because it indicates prudent financial practices and a decreased debt burden relative to its peers.

Authorized vs. Paid-Up Capital

The amount of authorized share capital must be listed in the company’s founding documents. These changes must be documented and made public whenever the authorized share capital changes.

Paid-up capital can be found or calculated in the company’s financial statements. The Securities and Exchange Commission (SEC) requires that publicly traded companies disclose all sources of funding to the public.

What Is Par Value?

Par value is the face value of a stock certificate or bond. It’s set in the company’s corporate charter and is its denomination. It can be more or it might be less than what a stock is currently trading for.

What Is a Company’s Debt-to-Equity Ratio?

A company’s debt-to-equity ratio is calculated by dividing the sum of its long-term debt, short-term debt, and other required fixed payments by its shareholders’ equity. A high ratio indicates that the company can comfortably meet its obligations through cash flow rather than equity financing.

How Are Dividends Paid?

Dividends are a percentage of a company’s profits paid out to its shareholders. Not all companies offer them. Their timing and which shareholders might receive them are determined by the company. They can be paid monthly, quarterly, or even annually. It depends on the company and the terms it has set so it can bear looking into before you invest.

The Bottom Line

Share capital is all money acquired by a company through the sale of common or preferred shares of stock. It’s based on only the initial sale of shares and doesn’t include the values of shares that are subsequently traded.

Paid-up capital is similar but it’s focused specifically on what shareholders have paid per share. It’s not subject to repayment. Understanding both can be critical to smart investing.

Disclosure: Investopedia does not provide investment advice. Investors should consider their risk tolerance and investment objectives before making investment decisions.