Sometimes referred to as authorized capital, nominal capital is the amount of capital that a business can offer to shareholders, in the form of shares of stock. In most nations, the amount of this nominal share capital is regulated by governmental agencies that determine the financial stability of the business and the company’s ability to cover the value of those shares. Those same regulations also govern the number of shares that may be issued, based on the assets that the company has on hand to back those shares.
While governmental regulations place limits on the amount of shares that a company can issue, most businesses choose to not make an offering that is composed of their entire nominal capital. More often, only a portion of the capital is used to create stock offerings and issue shares of stock. This creates a situation where the business is able to offer a second stock offering at some point in the future, when the owners and directors determine that issuing additional shares would be in the best interests of the company.
For example, a business may have $1,000,000 US dollars (USD) in nominal capital. Rather than issuing shares that represent that entire amount, the company prepares an offering that is composed of $400,000 USD. Assuming all the shares in the offering are sold to investors, and those shares begin to trade at a value above the share price set at the initial offering, the business realizes an increase in capital, even as the investors earn returns on the shares they purchased. At a later date, the company can issue additional shares that represent another portion of the nominal capital, timing the release so that the shares are aggressively traded and help to increase the market value of the shares.
Should the shares fail to increase in value, or if they actually begin to fall below the initial offering price, the business is somewhat insulated from incurring a crippling loss. Since only a portion of the nominal capital is tied up in the stock offering, the other assets of the company are protected from the loss, and the business can continue to operate in spite of the loss. By taking steps to cut expenses and create more return from products sold, the company has a better chance of offsetting the loss, even as it seeks to capture new sectors of the consumer market and possibly ride out whatever factors led to the depressed unit price of the stock shares.
