Capital structure is the method by which a company finances assets through a mix of debt, bonds, stock, and other equity investments. Share capital structure represents the specifics on the types of stock issued by a company for its equity portion of the total capital structure. The most common types of stock in share capital structure include common and preferred, though some companies may have hybrid stocks. Common stock typically carries a right to reimbursement along with voting rights. Preferred stock carries higher claims against a company’s assets and liabilities, along with dividend rights, in basic terms.
Equity as part of a company’s capital structure is more common for larger organizations than smaller ones. It can take several months to set up an organization for issuing stock and maintaining the regulations for a publicly held company. Smaller companies typically seek equity investments from capital firms or venture capitalists. The rights and agreements that pertain to these equity investments are often much different than the rights that pertain to bonds or other debt. Creating the best share capital structure is also important for large organizations that issue stock.
Common stock is often the type with which investors are most familiar. These shares represent ownership of a company and allow the stockholder to vote on various issues. The ownership level for common stock is usually the lowest of any equity investment in a public company, meaning an investor can lose his or her entire investment in the business. Additionally, common stockholders may not receive dividends unless there is money left over after paying dividends to preferred shareholders. Based on this data, companies may desire larger portions of common stock for their share capital structure.
Preferred stock also represents ownership in a company and pays out dividends at periodic times throughout a year. These shares do not usually carry voting rights for issues within the company. Other benefits, however, include the ability to gain financially from increases in the stock price. Most investors who purchase preferred stock are those who get in on the company’s initial public offering, buying the stock at the lowest price possible when issued. Companies may not desire preferred stock as part of share capital structure as the dividends represent cash that lowers the financial return of a project. If a company liquidates, these shareholders will also have a claim against any money left from a business liquidation.