What are the Different Types of Shared Capital?
18 February, 2025
Synopsis
- Shared capital plays an instrumental role for a limited company’s structure and market reputation.
- Understanding the different types of shared capital helps company owners run their business effectively.
- Share capital restricts the company's fixed cost from going higher and boosts creditworthiness.
Equity capital or share capital refers to the funds raised by a company issuing equity stocks to shareholders. Share capital has its fair share of merits and demerits. Hence, it makes sense to form a comprehensive understanding as business owners. This article explains share capital meaning and explores different types and classes of share capital for investors.
Understanding Equity Capital and Its Context
There is equity capital and there is debt capital. Equity capital is one that is raised from shareholders. The company has no legal obligation to return this capital back to shareholders. Shareholders become owners of the company by investing equity capital in it. On the other hand, a company has legal obligation to return debt capital back to creditors. If it is unable to pay back the interest and principal on debt, when they become due, it will be rendered bankrupt.
Exploring The Types of Equity Capital
There are two broad types of equities:
Preferred equity shares: Preferred equity shares are issued to raise equity capital. Holders of preferred equity shares have the right to earn a fixed rate of dividend. A company will have to pay dividends to preferred shareholders first before it can distribute dividends to common shareholders. However, a company is not rendered bankrupt if it fails to pay the promised dividend to preferred shareholders. The dividends due simply accumulate. Whenever the company pays dividends next, it will have to first pay the accumulated dividends to holders of preferred stocks before it can distribute them to common shareholders.
Common (equity) shareholders: Common shareholders are the owners of the company. They enjoy voting rights. Common equity shares are issued to this category of shareholders.
Some common terms that are used in the context of equity capital
The following are some common terms that are used in the context of equity capital :
Authorised capital (Nominal or Registered Capital): Authorized share capital is the maximum number of shares that the company can issue, as per its Memorandum of Association. The company can change its authorized capital through board resolutions.
Unissued Capital: Unissued capital is the part of authorized capital that has still not been used for raising further capital.
Subscribed Capital: Subscribed capital is part of Authorized capital that has still not been issued for raising further capital.
Called-up Capital: Called-up capital is any capital that shareholders owe to the company but have still not paid them.
Paid-up Capital: Paid-up capital refers to capital that has been paid by shareholders for the shares that they own in the company.
A demat account with HDFC Securities
You need a functional demat account to track your shares effectively. You can invest in the shares of different companies through your HDFC Securities demat & trading account. For investors, there’s more than one reason to open an HDFC Securities demat & trading Account. You can enjoy the freedom to invest in various securities, including ETFs and mutual funds. You will have the one-click investment option to invest in various assets. It will also be more convenient for you to get digital loans.
Click here to open an HDFC Bank Demat Account now!
*Disclaimer: Terms and conditions apply. This is an information communication from HDFC Bank and should not be considered as a suggestion for investment. Investments in securities market are subject to market risks. Read all the related documents carefully before investing.
