Issuance of Stock: Everything You Need to Know
Issuance of stock is linked to the maximum amount of shares a company can issue to its shareholders.3 min read
2. Issuing Stock
3. Employee Stock Options
4. Repurchasing Stock
5. Treasury Stock
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.
- 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
- 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.
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.
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.
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 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.
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