Authorized stock, also known as authorized shares, refers the maximum amount of shares that a business is legally allowed to issue, as stipulated in the constitution within the U.S., or in the charter of the company in other regions of the world. It is typically listed in the capital account area of the balance account. Authorized shares are not to be confused with the outstanding share, which refer to the shares the company has actually issued and are owned by the public.
If a company is created it determines the amount of shares it would like to issue. These shares are known as “authorized stock. Shares that are offered to the general public for trading on the market are the entire or a part of the authorized stock of a company. The quantity of shares open for trading is known as floating. Furthermore, restricted shares that are used to reward employees and incentive programs are also included in authorized shares. The total value of the company’s current shares as shown on its balance sheets is product of restricted and floating shares. If the outstanding shares are lower than authorized shares the distinction (unissued shares) is what the business keeps in its the treasury. A company that issue all of its authorized shares has its outstanding shares equivalent to authorized shares. Outstanding shares are not allowed to exceed the authorized number because the authorized shares total is the highest number of shares that a business can issue.
Table of Contents
The Reasons a Business Might not issue all of its authorized shares
The number of shares authorized is usually higher than the number actually issued and allows the business to offer and sell additional shares later on should it is required to raise funds. For instance that a business has 1 million shares authorized however, it could only sell only 500,000 shares in the course of its first public sale (IPO). The company may hold 50,000 shares of its authorized stock to be used as option stock for the purpose of attracting and keep employees. It could sell 150,000 more in the form of a secondary sale to raise additional funds in the near future. The remaining stock that has not been issued to remain in the company’s treasury accounts is expected to be one million 100,000 – 500,000 150,000 = 300,000. Another reason why a business might not be able to issue all their authorized stock is in order to keep the majority stake in the business and to avoid the possibility of an taking over by a hostile party.
An example of Authorized Stock
The Amazon Corporate charter for instance stipulates that the total authorized stock must comprise 5 billion shares of its common stock as well as 500 million shares preferred stock. The charter allows Amazon to raise its authorized stock in the event that there’s not enough unissued common stock to permit the conversion to preferred shares. Corporate charters usually require shareholder approval for an increase in the amount of shares authorized by the stock. Authorized Stock of a corporation.
An investor may wish to know the number of authorized shares the company holds to determine the possibility of the possibility of stock-based dilution. Dilution lowers the stockholder’s share in ownership as well as the power to vote in a business and also reduces the company’s earning per share (EPS) in the aftermath of the issue of new shares. The greater the gap between the authorized number of shares and the amount of shares outstanding more likely for the possibility of dilution.Authorized Stock of a corporation.