WHAT EXACTLY IS CAPITAL STOCK??
I have come across this financial term many times when reading through investing books and various financial pages but have never really had a clear cut definition of what capital stock is. So after some research, this is what I came up with.
To understand this very well we first have to briefly look at what a corporation’s charter(or articles of incorporation) is. This is a document that provides for the creation of the business as a corporate entity. It details everything that about the corporation like its objectives, capitals and management structure, operations etc. basically everything that makes up the corporation.
Capital stock is a broad classification of all the shares that claim ownership of the issuing company and thus encompasses or is subdivided into other subclasses of stock like common and preferred.
All the intricate details on the subdivisions of capital stock into common, preferred, total volumes of each to be issued etc is all put down in the charter of the corporation.
So one can say that capital stock is simply the business itself in that lets say I have am the sole owner of a business. So in stock terms, I own 100% of the capital stock. So if I want to raise more money or go into business with other people (partners), I would sell part of the business to them, say 30%, leaving me with 70% of the capital stock. This stock which is divided into the other types of stocks that I have written of in the past can be sold to the public in an IPO(initial public offering) to raise more money for expansion or whatever. These shareholders are entitled to a dividend, voting powers in the companies affairs or whatever privileges the initial (capital stock) owners decide these new shareholders should have. A slight difference between capital stock and the other subdivisions is that the capital stock holders of the business(the incorporators) are the ones to set the price of the common, preferred shares which could be based on a large number of things like the balance sheet position, goodwill, future prospects, privileges that each stock classification enjoys etc.
As the above implies a company can have different classes of stock outstanding but when it only has capital stock outstanding, it can be sometimes referred to as common stock.
Something else about capital stock that is worth mentioning is that according to free dictionary, it is the total stated or par value of the permanently invested capital in the corporation. Also according to the dogs of the dow, “capital stock does not bear a relationship to the asset value or stock outstanding. Capital stock must first be issued and listed inorder to be publicly available for stock market trading. Capital stock is usually listed as a corporate asset in the charter and capital stock contribution additions are typically noted in corporate charter documents”.
The best explanation that I found on capital stock is from this wisegeek article.
That’s about it, it is not a new type of stock, just another word for the same old things