What is Capital Stock?
Capital stock is the number of shares that a company's charter authorizes for issuance.
How Does Capital Stock Work?
A corporate charter is a legal document that sets forth a corporation's basic information, such as its location, profit/nonprofit status, board composition, and ownership structure. Corporate charters typically include the number of shares that the company is authorized to issue (both common and preferred stock) in total forever. The founders and board members typically decide what the amount of capital stock will be, with input from their attorneys and industry norms. The capital stock amount becomes public record when the company files the corporate charter with the secretary of state for the state in which the corporation is headquartered.
Why Does Capital Stock Matter?
Capital stock is not necessarily equal to the number of shares that are currently outstanding; capital stock is the maximum number of shares that can ever be outstanding. If companies want to change this number, they must amend their charters. When companies do this, it may be an indication that companies intend to raise capital.