Authorized Stock: Everything You Need to Know
Authorized stock is the number of shares a company is allowed to give away to shareholders, which is stated in the company's charter.4 min read
What is Authorized Stock?
Authorized stock is the number of shares a company is allowed to give away to shareholders. This number is stated in the company's charter. In the United States, this is called the Articles of Incorporation.
Authorized Stock is also called authorized capital stock, authorized shares, or authorized share capital. This number can only be changed if the current shareholders approve it. This is done with a vote (and a lot of paperwork). Due to this, many companies have a higher authorized stock number than the number of stocks they plan to issue.
Why Are Authorized Shares Important?
- Many states and international articles of incorporation, called memorandums of association in some countries, require companies to authorize shares.
- This number will have a direct effect on how much you will pay in fees when you incorporate. This amount will vary depending on what state you incorporate in.
- It gives corporations the option to raise money in the future by selling shares of their company to investors. The more authorized shares you have, the more opportunity you have to raise money.
The Difference between Authorized, Issued, and Outstanding Shares
1. Authorized shares are the total number of shares allowed for the company to issue. For instance, a company puts in their charter that the authorized shares will be 50,000. That is the maximum number of shares they can give away or sell. The only way to change this is with a vote of all of the shareholders. This number is usually higher than issued shares.
2. Issued shares are the number of shares that have been given to or sold to investors to raise money for the company. If the authorized shares are 50,000, the issued shares can be anywhere between 0 and 50,000. This number can never be larger than the authorized shares.
Whenever a company issues new stock, the value of all issued stock is lowered or diluted.
3. Outstanding shares are the number of shares that shareholders own. It is owned by members of the public and not the company. It generally does not come with votes or any control over the company. This number can be the same as issued shares. If the company "issues" 10,000 shares to investors, then they have 10,000 shares outstanding. If they then decide to buy back 1,000 of those shares, the outstanding shares are now only 9,000 (but "issued shares" is still 10,000). This is often done to return money to the shareholders.
- The stock that has been repurchased is known as Treasury stock. Outstanding shares are equal to issued shares minus treasury stock.
Stock Options Versus Stock Warrants
- A Stock Option is a contract between a buyer and seller of a stock. The two parties agree that the buyer can buy a certain amount of stocks at a specific price from the seller. The contract has a fixed time period. The buyer does not have to buy the stocks if he or she does not want to. Stock options are generally between one investor and another.
- A Stock Warrant is similar to a stock option. The main difference is that the seller is the company and the shares in questions are newly issued stocks (they have never been sold before). This means the value of all the other shares will be diluted. Stock warrants are usually issued at a lower price than what the value is expected to be in the future.
- While stock options are generally only for two-three years, stock warrants can be valid for many years.
Frequently Asked Questions
- How Many Shares Should I Authorize?
You should authorize enough shares to accommodate growth within the company. There should be enough for all the initial shareholders. You should think about the sort of future investment you will want as your company grows. It is best to be generous with this number. You can have 100 million authorized stock but only issue 1 million. However, if you only have 10,000 authorized shares, you can only issue 10,000 shares. The recommended starting number is 10 million.
- What is Preferred Stock?
Preferred stock is also a number that is decided during the company's incorporation. Authorized stock consists of both Common Stock and Preferred Stock. The two together are also called Capital stock. Common stocks are normal shares. Preferred stocks will give the owner special rights. Someone who owns preferred stock may have more voting power than someone who owns the same amount of common stock. Owners of preferred stock will also likely receive more dividends than an owner of a common stock.
- What is an Option Pool?
An option pool is a number of shares than have been set aside for employees. It is an incentive created by companies to bring talented workers to a new company. It is basically a promise to a new employee that when the company "goes public" and begins issuing shares, he or she will receive a certain number of those shares.
- What is Par Value?
Par value is the number the company decides is the base value of the stock. Simply, it means the company can never sell a stock or share for less than the par value.
- What is a stock split?
A stock split is when a company issues more stock. This increases the number of shares in a company while reducing (diluting) the share price.
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