Common Stock

Common stock is a component of shareholder equity on a company's balance sheet which represents the interest of the company's owners.

Unlike a sole proprietorship or a partnership (in which the capital is contributed by one or a limited number of people), companies are normally owned by hundreds and thousands of people. The share capital of companies is divided into large numbers of shares called common shares. A common share is evidence of ownership in a company and represents a right to its net assets. It makes transfer of ownership easy and is the prime reason for popularity of companies as a form of business.

Par value of common stock

A company normally assigns a value called par value to a share of its common stock and mentions it in the legal document. The figure might be $1 or $10 or $100 or just trivial. For example, the par value of a share of Microsoft is $0.00000625. However, it is not mandatory for a company to assign a par value. For example, Apples Inc. has no par value assigned to its shares.

Stated value of a common stock

Stated value is a value attached to a share of common stock with no par value. Stated value per share is used to determine the legal capital of the company for accounting purposes.

Authorized capital

A company has to obtain authorization from the relevant securities regular regarding issue of share capital. Authorized capital is the number of shares which the company is authorized to issue.

Issued capital

Issued capital is the number of shares which the company has issued. It is lower or equal to the authorized capital.

Outstanding capital

Outstanding capital is the issued capital of the company minus its treasury stock.

Comprehensive Example

The common stock portion of the equity section of Apple Inc. balance sheet as at 24 September 2011 is given below:

Common stock (no par value):
Shares authorized1,800,000
Shares issued and outstanding929,277
Value in million Dollars13,331

It provides the following information:

  1. The company has no par value stock.
  2. There is no stated value disclosed.
  3. Authorized share capital is 1.8 million shares.
  4. The company has issued roughly half of its authorized share capital as at 24 September 2011.
  5. The company has no treasury stock that is why shares issued and shares outstanding are equal.

Written by Obaidullah Jan, ACA, CFA <--- Hire me on Upwork