Unlocking the Essentials of Issued Shares
Issued shares are a subset of authorized shares that have been sold and held by a company’s shareholders, whether they be insiders, institutional investors, or the general public. These shares are documented in the company’s annual report. Issued shares encompass the stock a company sells publicly to generate capital and the stock given to insiders as part of their compensation packages. In essence, authorized shares represent the total number a company can ever issue or sell, while issued shares are the portion of those shares that a company has sold or otherwise placed in the market, including shares held in their treasury.
Key Takeaways
- Issued shares are a company’s equity shares held by investors and insiders, as well as those reserved for employee compensation.
- Unlike outstanding shares, issued shares include treasury shares—stock a company repurchases from shareholders.
- The number of shares issued must be authorized and approved by a company’s board of directors (BofD).
Issued shares also differ from outstanding shares. Outstanding shares are the number of shares currently available for purchase by investors but do not include shares the company holds in its treasury. Issued shares can be contrasted with unissued ones, which have been authorized for future offerings but have not yet been issued.
Understanding Issued Shares
A company issues a share only once. After that, investors may sell it to another investor on the secondary market. When companies buy back their own shares, these shares remain listed as issued even though they are not classified as treasury shares since the company may resell them. In a small, closely held corporation, the original owners may hold all the issued shares.
The number of issued shares is recorded on a company’s balance sheet as capital stock or owners’ equity, while the shares outstanding (issued shares minus any shares in the treasury) are documented in the company’s quarterly filings with regulatory bodies. Both issued and outstanding shares are also found in the capital section of a company’s annual report. These figures are crucial for calculating market capitalization and earnings per share.
Authorized shares are those a company’s founders or board of directors (BofD) have approved in their corporate filing paperwork. Issued shares are those the owners have decided to sell in exchange for cash, which may be less than the number of shares actually authorized.
Issued Shares and Ownership
In a corporation, ownership is typically determined by examining who holds the issued shares. These shares encompass those distributed during the company’s initial startup phase or through secondary offerings. It’s essential to consider not only the issued and outstanding shares but also those that could be issued in the future. This more inclusive view is captured in the “fully diluted” calculation, accounting for shares that would be issued if all stock options and convertible securities were exercised.
Another method for projecting ownership involves measuring issued and authorized shares. This approach, called the “working model” calculation, forecasts potential changes in shareholder positions based on the total number of shares a company might issue, along with those already issued. This speculative view of ownership can be vital for strategic planning.
Example
Imagine a startup issues 10 million shares out of 20 million authorized shares to an owner, making the owner the sole shareholder and controller of 100% of the corporation.
Board members typically employ the fully diluted or working-model calculations for planning and projecting. For example, if the board plans to issue two million additional shares to an investor and offer three million as stock options to employees, it might also allocate additional stock options to founders to prevent significant dilution of their ownership percentage.
Issued Shares vs. Outstanding Shares
Issued shares represent all the stock a company has issued. Outstanding shares, on the other hand, are the shares circulating in the market that investors can trade. Often, the number of issued and outstanding shares will be the same. However, discrepancies can arise, particularly with larger companies, where not all issued shares will be publicly held.
For example, when a company repurchases its shares and holds them in its treasury, these shares are counted as issued but not as outstanding. Conversely, outstanding shares are issued shares minus any shares in the treasury.
A publicly traded company’s total number of shares outstanding is usually available on exchange platforms and found in the shareholder’s equity section of the company’s balance sheet.
Differentiating Authorized Shares and Issued Shares
Authorized shares are the total number a company can legally issue, while issued shares are the actual number issued so far. The figures for authorized and issued shares may be the same or different, with authorized shares typically being more numerous.
Why Do Companies Issue Shares?
When a company issues shares, it sells parts of its ownership to the public in exchange for capital. The primary goal is to raise money without taking on excessive debt. Initially, shares are issued through an initial public offering (IPO). Later on, if additional capital is needed, the company may issue more shares through options like rights offerings.
Disadvantages of Issuing Shares
The disadvantages of going public include compliance with extra regulations and disclosure requirements. Public trading increases scrutiny and additional accounting and operating costs. Furthermore, issuing more shares later may lead to shareholder dissatisfaction due to ownership dilution. Rights offerings, in particular, can harm a company’s reputation and deter investors, requiring the new shares to be sold at a discount to their current price to attract interest.
The Bottom Line
Companies issue shares to raise capital by selling a portion of ownership to the public. Initially, they achieve this through a set issuance of shares to investors, which are then traded among investors in secondary markets.
Issued shares consist of those the company’s founders or board of directors have decided to sell for cash. They include shares held by investors and employees (outstanding shares) and those bought back by the company and removed from the market (treasury stock).
Related Terms: outstanding shares, initial public offering, shareholders’ equity, stock buyback, capital stock.
