Share capital and the share price

A student who has just learned how a company raises money by selling shares often makes a reasonable-looking leap. If the shares are worth more, the company’s share capital must have grown too. Share prices are quoted daily and they rise and fall.

It seems natural that the “share capital” figure in the accounts should move with them. It does not.

A company can watch its share price double or halve while the share-capital line in its statement of financial position stays still. Seeing why shows the difference between what a share is worth to an investor and what it represents in the company’s own books.

Two numbers that are easy to confuse

The first figure is the market price of a share: what someone will pay to buy one from an existing holder today. It can change by the hour. The second is the company’s share capital: a figure in its accounts that reflects the shares it has issued.

They answer different questions. The market price asks what one share is worth to a buyer right now. The share-capital figure records something fixed about how the company was funded.

Both concern shares, so learners assume they rise and fall together. They measure different things.

Shares are recorded at nominal value

Every share is given a nominal value, also called face value, when it is created. It is a fixed figure attached to the share, such as RM1. The share-capital figure is the number of shares issued multiplied by the nominal value.

If a company issues 100,000 ordinary shares of RM1 each, its share capital is RM100,000, and that appears in the equity section. The nominal value is set once and does not drift. It is not an estimate of what the share is worth.

It is a fixed unit that defines the size of each slice of ownership. Share capital is built from nominal values, not prices.

Why the market price moves

The market price is free to move. Buyers and sellers trading shares with one another set it, and it reflects their view of the company’s prospects: expected profit and confidence.

If people grow optimistic, they bid the price up. If they lose confidence, it falls.

A RM1 share might change hands for RM3 in a good spell or 40 sen in a poor one. None of this affects the nominal value.

The price floats on opinion. The nominal value stays at the figure fixed when the share was created.

A sale on the market never reaches the company

When a share is bought and sold on the market, the money passes between two investors, the seller and the buyer. The company is not part of that deal. It receives nothing, pays nothing and has no reason to change its records.

Think of reselling a concert ticket. If you sell yours to a friend for more than you paid, the money goes from your friend to you. The venue that first sold the ticket sees none of it.

Everyday trading in a company’s shares works the same way. The company is not a party to these later sales, so its share capital has no reason to move when the price does.

What share capital tells you

Share capital records the ownership the company has created and issued, measured at nominal value. It tells a reader how much of the company’s resources came from selling shares, not what those shares are worth today. It is a historical figure, a stable statement of how the business was funded through its owners, not a live valuation.

Paying more than nominal value does not change it either

When a company first issues shares, it can ask investors to pay more than the nominal value if the business is well regarded. Even then, only the nominal amount is added to share capital.

If a RM1 share is issued for RM1.50, the RM1 goes to share capital. The extra 50 sen is recorded separately, as share premium. So even when real money flows in, share capital records only nominal value.

What does change share capital

Share capital changes only when the company itself creates and issues more shares, or in some cases cancels some. Issue another 50,000 shares of RM1 each and share capital rises by RM50,000, because 50,000 new nominal units of ownership exist.

This is an action the company takes, and it is recorded because the company is directly involved. In a market sale, it stands aside. So share capital responds to what the company does with its own shares, never to what outsiders pay to trade shares that already exist.

Why the accounts keep the two apart

Someone studying a company wants to know how it was financed: how much came from owners and how much from borrowing. A steady figure answers that clearly. A number that rose and fell with daily sentiment would blur the picture.

So the accounts hold the two apart: nominal value for structure, and market price for what a share is worth on a given day. That is why the statement of financial position does not react every time the share price makes the news.

If your child assumes a rising share price must increase share capital, one of our teachers can set nominal value and market value side by side. Then it is clear why one stays fixed while the other floats. Book a trial class