Key Takeaways

  • A stock company primarily issues insurance policies such as life, health, property, or casualty policies, funded by shareholders and driven by profit.
  • The stock issuance process must comply with state and federal securities laws and often involves board approvals, shareholder agreements, and fair market valuations.
  • There are multiple types of stock policies a stock company may issue, with unique benefits and implications for investors.
  • Accounting for stock issuances requires recording at par or stated value, noting additional paid-in capital, and following GAAP principles.
  • Stock issuance can affect ownership control, company valuation, and financial transparency.

Issuance of stock is linked to the maximum amount of shares a company can issue to its shareholders. This is usually made up of the total of outstanding treasury stock and shares, as well as shares the company has regained ownership of. Issued stock refers to the shares that the company is able to sell.

Common and Preferred Stock

Companies can issue two different kinds of stock: common and preferred shares. Although part of a company's authorized capital typically is not issued, shareholders can vote on how much capital they want to keep in reserve.

Common shares:

  • Are usually issued in the United States
  • Allow their owners to vote on company decisions
  • Are seen as a riskier bet than preferred stock, but may produce better returns

Preferred shares:

  • Combine features of equity and debt
  • Give their owners priority over common shareholders when dividends are paid
  • Can be converted into common stock

Whether a company issues common shares or preferred stock, it records the transaction in the stockholder's equity section of its balance sheet. The report includes the price of the share on the market when it was bought by an investor.

Issuing Stock

Various steps have to be taken by a company to issue stock. Shares cannot be issued without the approval of the company's board. The company must then be paid something of value for the stock.

When a company issues stock, it also needs to comply with securities laws at the state and federal level. Key requirements include providing potential investors with information about the company and clearly explaining the possible risks involved with the investment.

In some situations, companies may receive an exemption from the requirement to inform investors of potential risks. This may happen, for example, if the prospective shareholder is already an investor in the company or has done business with it. This could apply to many newly-established small businesses, whose shares are often held by board members or relatives of leadership members.

Accounting Treatment of Stock Issuance

Proper accounting for stock issuances is vital for financial transparency. The main steps include:

  • Recording the Par or Stated Value: This nominal amount is entered into the common stock or preferred stock account on the balance sheet.
  • Recognizing Additional Paid-in Capital (APIC): If stock is issued at a premium (above par), the excess goes into the APIC account.
  • Issuing for Non-Cash Consideration: If shares are exchanged for services or property, the fair market value of what’s received must be determined and recorded.
  • Disclosure in Financial Statements: Footnotes should detail the number of shares authorized, issued, and outstanding, as well as any rights and restrictions tied to the stock classes.

All of these must comply with Generally Accepted Accounting Principles (GAAP) in the U.S.

Legal and Regulatory Requirements for Stock Issuance

The issuance of stock is heavily regulated to ensure fair dealing and transparency. Key requirements include:

  • Board and Shareholder Approval: The company must obtain authorization from its board of directors and, in some cases, its shareholders, especially when issuing large volumes of new shares.
  • Filing and Documentation: This includes amending the Certificate of Incorporation if the issuance exceeds the currently authorized share limit and issuing stock certificates or using electronic shares.
  • Fair Market Value Determination: The shares must be issued for adequate consideration—either cash, services, or other assets—often requiring a 409A valuation for startups.
  • Compliance with Securities Laws: Federal regulations such as the Securities Act of 1933 and state-level “Blue Sky Laws” apply, which may require the filing of Form D or other exemption claims if the stock is privately placed.
  • Issuance Logs and Cap Tables: Companies must maintain accurate records of issued shares, often via a capitalization table that tracks ownership percentages and valuation impacts.

Stock Companies and the Type of Policy They Issue

When discussing the phrase “a stock company issues which type of policy,” it typically refers to insurance stock companies. These are for-profit organizations owned by shareholders, and the type of policy they issue can include:

  • Life insurance policies – covering risks associated with death, providing financial payouts to beneficiaries.
  • Health insurance policies – covering medical expenses and hospital visits.
  • Property and casualty policies – covering damages or losses to property and protection against legal liabilities.

Unlike mutual insurance companies, where policyholders are also owners, stock insurance companies are owned by shareholders and are profit-driven. This structure can influence underwriting standards, dividend practices, and premium rates.

In financial markets, a company that issues stock (not limited to insurance) may raise capital for growth, acquisitions, or general operations. Issuance decisions must align with shareholder interests and strategic goals, especially in publicly traded stock companies.

Employee Stock Options

A company can also issue an employee stock option (ESO) as part of an employee's compensation package. The employee then has the option of exercising the stock option, ideally at a time when the company's share price on the market is higher than the ESO's exercise price. If they are able to do this, they will gain ownership of company stock at a below-market price.

ESOs are usually granted to managers in the company. By issuing them, the company aims to encourage employees to help boost the business's share price.

Certain restrictions apply to ESOs. One of them is referred to as a vesting period, which means that a period of time must pass before the ESO holder can exercise their rights. For example, the company could stipulate that an employee can only sell 20 percent of their options each year for five years.

Repurchasing Stock

A company can decide to buy back its own shares in order either to withdraw the shares from circulation or reissue them. In some instances, the repurchasing of shares has the effect of supporting current shareholders by boosting the company's stock price.

Companies may repurchase their own stock in order to:

  • Withdraw it from circulation, which is referred to as retiring the shares
  • Reissue the stock at a higher price in the future
  • Hold on to the shares, which become known as treasury stock
  • Issue the shares to their employees

If the company's goal is to retire the shares, the treasury shares continue in existence until the company's overall capital is reduced.

There are sometimes other motivations behind a company's decision to repurchase stock, including to prevent a takeover. Additionally, the company may feel its shares are currently undervalued on the market.

Treasury Stock

Treasury stock can't be described as unissued stock because it remains legally available to buy.

When the company chooses to reissue treasury stock, it is not obliged to offer the stock to existing shareholders first. The company must first offer any additional stock being issued on a date after the original date of issue to existing shareholders on a pro rata basis. This so-called "preemptive right" of shareholders is supposed to ensure that they can continue to own a fixed percentage of the company's stock.

Impact of Stock Issuance on Ownership and Company Value

Issuing stock can have significant implications:

  • Dilution of Ownership: Existing shareholders may see their ownership percentage decrease unless they participate in the new issuance.
  • Increased Capital: Issuance brings in new funds that can be used to expand operations, reduce debt, or invest in R&D.
  • Market Perception: Public announcements of stock offerings can influence investor sentiment and the company’s stock price.
  • Control Considerations: Issuing new shares can shift voting power, especially if preferred shares with voting rights are introduced.

Companies must balance the need for capital with the potential downsides of dilution and control shifts.

Frequently Asked Questions

  1. What type of policy does a stock company issue?
    A stock company typically issues insurance policies such as life, health, and property insurance, funded by shareholder capital.
  2. What is the main difference between a stock company and a mutual company?
    A stock company is owned by shareholders and aims to generate profit, while a mutual company is owned by its policyholders and often prioritizes policyholder benefits.
  3. Does stock issuance always dilute ownership?
    Yes, unless existing shareholders buy additional shares to maintain their proportion, stock issuance dilutes ownership.
  4. How is stock issuance recorded in accounting?
    It's recorded at par or stated value under stockholders' equity, with any amount above par listed as additional paid-in capital.
  5. Can a private company issue stock?
    Yes, private companies can issue stock, usually through private placements that must comply with exemption rules under federal and state securities laws.

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