What is Authorized Stock?
Authorized stock, also known as authorized shares, represents the maximum number of shares that a corporation is legally allowed to issue, as detailed in its articles of incorporation in the U.S. or the company’s charter globally. It is typically listed in the capital accounts section of the balance sheet. Authorized shares are different from outstanding shares, which refer to the number of shares the corporation has issued and that are held by the public.
Understanding Authorized Stock
When a company is created, it determines the maximum number of shares it would like to offer. These shares are known as authorized stock. The shares issued to the public for trading on open markets form a portion or entirety of a company’s authorized stock. The actual number of shares available for trading is referred to as float. Additionally, restricted shares, which are reserved for employee compensation and incentives, also form part of authorized shares. The total number of a company’s outstanding shares, as seen on the balance sheet, is the sum of float and restricted shares. If the number of outstanding shares is less than authorized shares, the difference (unissued stock) is what the company retains in its treasury. A company that issues all of its authorized stock will have its outstanding shares equal to authorized shares. Outstanding shares can never exceed the authorized number since the authorized shares total represents the maximum number that a company can issue.
Key Takeaways
- Authorized stock defines the maximum number of shares a publicly-traded company can issue, as stated in its articles of incorporation or charter.
- Shares issued to the public, known as outstanding shares, are a portion of the company’s authorized stock.
- The difference between authorized shares and outstanding shares constitutes what the company retains in its treasury.
Why a Company Might Not Issue All of Its Authorized Shares
Companies often authorize more shares than they issue to allow for future fundraising. For example, if a company has 1 million authorized shares, it might only sell 500,000 shares during its Initial Public Offering (IPO), reserve 50,000 for employee stock options, and potentially sell an additional 150,000 in a secondary offering to raise more money later. The unissued stock that remains in the company’s treasury will be 300,000 shares.
Another reason companies retain some of their authorized shares is to retain a controlling interest and mitigate the risk of a hostile takeover.
Example of Authorized Stock
Amazon’s corporate charter, for instance, specifies that it includes 5 billion shares of common stock and 500 million shares of preferred stock as its total authorized stock. If there isn’t enough unissued common stock available for the conversion of preferred stock, Amazon is permitted to increase its authorized stock. Corporate charters typically require shareholder approval to raise the number of authorized shares.
Investors might investigate the number of authorized shares to analyze the potential for stock dilution, which can diminish ownership and voting power, and reduce a stock’s earnings per share (EPS) following the issuance of new stock. The larger the gap between authorized and outstanding shares, the greater the potential for dilution.
Understanding authorized stock is crucial for both company leadership and investors as it can impact ownership structure, voting power, and value per share. This knowledge arms investors with valuable insights for making informed decisions.
Related Terms: Outstanding Shares, Stock Options, Initial Public Offering, Secondary Offering, Hostile Takeover.
References
- Amazon. “Certificate of Incorporation”.
