Capital Stock

Question: A corporation issues (sells) ownership shares to investors. The source of the resulting inflow of assets

into the business is reflected on its balance sheet by the reporting of a capital stock (or contributed capital)

balance. Thus, over its life, Motorola has received assets of $7.8 billion from stockholders in exchange for capital

stock. Does the company receive money in this way when shares are sold each day on the New York Stock

Exchange, NASDAQ (National Association of Securities Dealers Automated Quotation Service), or other stock

exchanges?

Answer: No, purchases and sales on stock markets normally occur between investors and not with the company.

Only the initial issuance of the ownership shares to a stockholder creates the inflow of assets reported by the

company’s capital stock or contributed capital account.

To illustrate, assume that Investor A buys capital stock shares directly from Business B for $179,000 in cash. This

transaction increases the net assets of Business B by that amount. The source of the increase is communicated to

decision makers by adding $179,000 to the capital stock balance reported by the company. Subsequently, these

shares may be exchanged between investors numerous times without any additional financial impact on Business

B. For example, assume Investor A later sells the shares to Investor Z for $200,000 using a stock market such

as the New York Stock Exchange. Investor A earns a $21,000 gain ($200,000 received less $179,000 cost) and Investor Z has replaced Investor A as an owner of Business B. However, the financial condition of the company

has not been affected by this new exchange. Thus, the capital stock balance only measures the initial investment contributed directly to the business.