Authorized Shares vs. Outstanding Shares: An Overview
Understanding stock market terminology allows investors to make appropriate, intelligent decisions. As it relates to company stocks, knowing the difference between authorized shares and outstanding shares is relevant in accurately calculating important ratios that speak to the financial stability of a company.
Key Takeaways
- Authorized shares are the maximum number of shares a company is allowed to issue to investors, as laid out in its articles of incorporation.
- Outstanding shares are the actual shares issued or sold to investors from the available number of authorized shares.
- A company may intentionally not issue shares as a defensive maneuver to reduce the possibility of a hostile takeover or loss of internal majority ownership.
- A company may also hold reserve shares. Reserve shares are authorized but not outstanding until included in stock option plans or redeemed through third party warrants.
- Understanding the difference between the two types of shares allows for more accurate calculations of financial ratios and a better understanding of a company’s financial stability.
Authorized Shares
Authorized shares, (also known as authorized stock or authorized capital stock), are defined as the maximum number of shares that a company is legally allowed to issue to investors, as per its own determinations. The maximum number is established in a company’s legal formation documents, known as the articles of incorporation.
There is no limit as to the total number of shares that can be authorized within these documents for a larger company, while smaller companies that do not plan to expand or that have a set number of shareholders are limited to the number of authorized shares that they designate. For a company that does not have an authorized shares restriction, the articles of incorporation may authorize one share or millions of shares.
The number of shares actually available to trade is known as float. There are also restricted shares, which are set aside for employee compensation and incentives. Restricted shares are also part of authorized shares. The total number of a company’s outstanding shares as seen in the balance sheet is the sum of float and restricted shares.
The number of authorized shares can be changed by way of a vote from shareholders, typically during the annual shareholder meeting.
Outstanding Shares
Shares that are issued or sold to investors from the available number of authorized shares are known as outstanding shares. The number of outstanding shares is set by the investment bank that implements a company’s initial public offering (IPO), but the number can change.
A secondary stock market offering can increase the number of outstanding shares, as can payment of employee stock options. Outstanding shares decrease when a company repurchases its own stock. The total number of outstanding shares cannot be greater than the total number of authorized shares as laid out in a company’s articles of incorporation.
For investors, understanding the difference between authorized and outstanding shares allows for more accurate calculations of financial ratios. For instance, using outstanding shares to determine earnings per share (EPS) could result in inflated gains, while using authorized shares may drastically offset a realized loss. Investors should have a strong understanding of these underlying terms in order to make correct calculations on a company’s financial stability and performance.
Outstanding shares represent ownership of the company. Holders of outstanding or issued shares typically come with voting rights and dividend distributions (if applicable).
Special Considerations
The number of outstanding or issued shares is always equal to or less than the total number of authorized shares. Companies often intentionally keep these two figures different so the organization has future flexibility to sell more shares in the future should it have financing needs.
Companies may also intentionally hold back authorized shares as a defensive maneuver. By retaining authorized shares, the company can maintain a controlling interest. The company can also reduce the possibility of a hostile takeover if a majority of shares have yet to be issued.
Authorized shares that have not yet been issued may also be intentionally set aside as reserved shares. Reserved shares may be used by the company as part of future stock option plans. These reserve shares may not issue the shares unless under the stock option plan. Reserved shares can also be issued via stock warrants to a third party.
What Is the Difference Between Authorized Shares and Issued Shares?
Authorized shares are the maximum number of shares can legally issue to shareholders. This number is established by the company’s articles of incorporation. Issued shares are the number of shares actually given to shareholders. If a company chooses not to issue all authorized shares, the total number of authorized shares will be greater than the number of issued shares. The number of issued shares can not exceed the number of authorized shares.
Can a Company Change its Authorized Shares?
Yes, a company can change the number of authorized shares it is allowed to issue. Public companies must often notify existing shareholders and call for a shareholder vote. The measure is then often reviewed at the following shareholder meeting. By changing the number of authorized shares, existing shareholders do not receive any compensation or existing shares.
How Do You Calculate Outstanding Shares?
For public companies, the number of outstanding or issued shares are publicly disclosed through required regulatory filings. Every time a company decides to issue or sell additional shares, it must often obtain board approval and record quantities via board meeting minutes, prepare appropriate documentation, and ensure compliance with state and federal securities laws.
When Can A Company Issue More Shares?
A company can issue more shares under certain circumstances. First, the company must have authorized shares that have not yet been issued (or have a plan ton increase the number of authorized shares if that is not the case). Second, it must obtain board approval to issue additional shares. Third, it must be able to comply with state and federal securities regulations for the issuance.
Can A Company Issue More Shares Than Authorized?
No, a company is limited to issuing only the quantity of shares it is authorized to issue. Breach of this limit breaks compliance with securities laws, and regulatory agencies will often consider the excessive issuance of improperly authorized shares as void.