What Is Nominal Capital?

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Nominal capital, also known as authorized capital, represents the securities that are designated for shareholders. Companies that release nominal capital to shareholders do so in order to generate income through traded shares. Ideally, the traded shares increase in value, thus increasing the overall capital for the company. Of course, the shares can also decrease in value, and as a result, nominal capital is clearly designated to protect the company's other assets.

The Facts

  • Nominal capital simply refers to the amount of capital--in shares--a company is legally authorized to make available to shareholders. Within the U.S., the nominal capital is generally provided within the company's legal documentation. In other words, the articles of incorporation for the company should state a specified amount that is set aside as nominal capital. A company is not obligated to release the full amount of nominal capital for issuance, and in many cases, the company releases only a portion of it.

Significance

  • The nominal capital represents a form of income for a company. Once the company divides up the shares by price, it can sell these to shareholders who literally pay for the right to hold a share in the company. For example, suppose a company has $500,000 of nominal capital and decides to issue $300,000 of it to shareholders. The company sets the share price at $1 per share, and all 300,000 shares are sold. As the shares begin to trade, their value generally goes up, and in time the shares might be trading for $3 per share. That $300,000 original value is now worth $900,000, and is thus an increase in capital for the company.

Features

  • The issued capital represents the portion of the nominal capital that has been issued to shareholders. The shares that have been issued and subsequently paid for represent the paid-up capital of the nominal capital. In some cases, the paid-up capital and the issued capital are equal, although this is uncommon.

Considerations

  • In some companies, the shares represent a form of retirement investment for employees. For example, a company may issue a specified number of shares for employee retirement accounts, and these shares remain untouched until the employee retires and then cashes them in. Shares are also issued to upper-level company members. When these members are required to pay for the portion of the shares they received, the shares are said to be called. Typically, this occurs when a company is struggling financially and literally needs to "call in" the money from shareholders who received the shares as compensation but did not necessarily pay for them.

Effects

  • Releasing the nominal value of a company is intended to function as potential income for a company, but sometimes it can fail--to the financial detriment of the company. Shares that begin trading for less than their initial value mean a loss in company worth. Returning to the earlier example, if the shares that were originally $1 per share begin trading at $.50 per share, the value of $300,000 has dropped to $150,000, creating a loss in capital for the company.

References

  • Photo Credit money money money image by Arman Zhenikeyev from Fotolia.com
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