Stockholders' Equity: Classes of Capital Stock

The corporation

Documents, books, and records relating to capital stock

Capital stock consists of transferable units of ownership in a corporation. Each unit of ownership is called a share of stock. Typically, traders sell between 100 and 400 million shares of corporate capital stock every business day on stock exchanges, such as the New York Stock Exchange and the American Stock Exchange, and on the over- the-counter market. These sales (or trades) seldom involve the corporation issuing the stock as a party to the exchange. Existing stockholders sell their shares to other individual or institutional investors. The physical transfer of the stock certificates follows these trades.

A stock certificate is a printed or engraved document serving as evidence that the holder owns a certain number of shares of capital stock. When selling shares of stock, the stockholder signs over the stock certificate to the new owner, who presents it to the issuing corporation. When the old certificate arrives, the issuing corporation cancels the certificate and attaches it to its corresponding stub in the stock certificate book. The issuer prepares a new certificate for the new owner. To determine the number of shares of stock outstanding at any time, the issuer sums the shares shown on the open stubs (stubs without certificates attached) in the stock certificate book.

Among the more important records maintained by a corporation is the stockholders' ledger. The stockholders' ledger contains a group of subsidiary accounts showing the number of shares of stock currently held by each stockholder. Since the ledger contains an account for each stockholder, in a large corporation this ledger may have more than a million individual accounts. Each stockholder's account shows the number of shares currently or previously owned, their certificate numbers, and the dates on which shares were acquired or sold. Entries are made in the number of shares rather than in dollars.

The stockholders' ledger and the stock certificate book contain the same information, but the stockholders' ledger summarizes it alphabetically by stockholder. Since a stockholder may own a dozen or more certificates, each representing a number of shares, this summary enables a corporation to (1) determine the number of shares a stockholder is entitled to vote at a stockholders' meeting and (2) prepare one dividend check per stockholder rather than one per stock certificate.

Many large corporations with actively traded shares turn the task of maintaining reliable stock records over to an outside stock-transfer agent and a stock registrar. The stock-transfer agent, usually a bank or trust company, transfers stock between buyers and sellers for a corporation. The stock-transfer agent cancels the certificates covering shares sold, issues new stock certificates, and makes appropriate entries in the stockholders' ledger. It sends new certificates to the stock registrar, typically another bank, that maintains separate records of the shares outstanding. This control system makes it difficult for a corporate employee to issue stock certificates fraudulently and steal the proceeds.

The minutes book, kept by the secretary of the corporation, is (1) a record book of the actions taken at stockholders' and board of directors' meetings and (2) the written authorization for many actions taken by corporate officers. Remember that all actions taken by the board of directors and the stockholders must be in accordance with the provisions in the corporate charter and the bylaws. The minutes book contains a variety of data, including:

  • A copy of the corporate charter.
  • A copy of the bylaws.
  • Dividends declared by the board of directors.
  • Authorization for the acquisition of major assets.
  • Authorization for borrowing.
  • Authorization for increases or decreases in capital stock.