Introduction to captstock
Capital Stock (Capstock) refers to the share base of the fund i.e. the number of shares held by the investors. There are 3 main Capstock transactions: subscriptions, redemptions and distributions.
Subscriptions/Creations – represent a purchase of capital stock shares/ units. Subscription increases amount of money held by the fund and the number of shares outstanding (i.e. the number of shares owned by investors).
Redemptions/ Liquidations/ Cancellations – a person sells their shares back to the fund. Shareholder receives the current per share value for each share owned. Redemption decreases amount of money held by the fund and the number of shares outstanding.
Distribution – fund distributes net income to shareholders based on number of shares they hold. Distribution decreases the amount of money held by the fund. A shareholder may elect to receive the distribution in cash (based upon a pre-determined distribution rate) or may elect a reinvestment.
Reinvestment is defined as using dividends, interest and capital gains, less the expenses, earned in an investment to purchase additional shares, rather than receiving the distribution payments in cash. Note that not all funds issue distributions to shareholders. Certain funds may decide not to issue any distributions. Therefore a shareholder must redeem out of the fund (sell some of their shareholding) in order to release cash held in the fund.
Accounting Entries for posting Capstock on TD +1
Receivable for Fund Shares (Asset) A/C DR
Capital A/C CR
Capital A/C DR
Payable for Fund Shares A/C CR
Accounting Entries for settling Capstock
Cash A/C DR (Asset)
Recievable for Fund Shares Sold (Asset) C/R
Account Payable for Shares (Liability) D/R
Cash A/C (Asset) C/R