Companies issue stock to raise funds from investors. Authorized stock is the maximum number of shares a company can issue. Outstanding stock is the difference between issued stock and repurchased stock held for resale. Issued stock is what the company has issued, which is less than the authorized stock. Each share of common stock represents an ownership interest, which is the ratio of the shares you hold to the outstanding shares.
Authorized stock is higher than issued and outstanding stock because companies need the flexibility of issuing additional shares without having to return to the regulatory authorities for approval. For example, a company may specify 10 million shares as the authorized number of shares in its incorporation documents. However, it may issue only 10 percent of the authorized amount when it lists on a stock market because the proceeds would be sufficient to fund operations. The accounting records would note the number of authorized shares but use the outstanding share count for calculating shareholders' equity.
The number of authorized shares is useful information for company management, but has no relevance for investors. You cannot access authorized shares until they start trading. A company may apply for an increase to its authorized stock if it needs to raise additional capital either for operations or for strategic acquisitions. The outstanding share count changes when a company issues new shares or repurchases existing shares. These changes can affect the stock price and thus the value of investment portfolios. For example, if a company issues new shares to pay off long-term debts or to raise funds for building new stores, investors might bid up the stock price in expectation of higher profits. However, if the company is issuing new stock to fund an acquisition, the stock price may fall in the near term because of share dilution.
Repurchases and Splits
Companies sometimes repurchase stock as a way of returning cash to shareholders. The repurchased shares either are retired or are recorded in a separate treasury stock account if the company intends to reissue them later. The number of outstanding shares is equal to the number of issued shares minus treasury shares. Companies may also announce stock splits to make the shares more affordable for individual investors. Stock splits increase the share count and reduce the share price. For example, a 2-to-1 stock split would double the outstanding stock and reduce the share price by about 50 percent. The company may have to increase the authorized stock. Reverse stock splits reduce the outstanding stock but increase share prices. Stock splits and reverse splits have no immediate effect on the total value of the shares in your portfolio.
The authorized and outstanding share counts change when a company uses stock to acquire another company. Investors receive shares in the acquiring company or in a brand new company. The legacy shares of one or both companies are retired. The companies would amend their articles of incorporation to reflect the new share structure of the merged entity.
Based in Ottawa, Canada, Chirantan Basu has been writing since 1995. His work has appeared in various publications and he has performed financial editing at a Wall Street firm. Basu holds a Bachelor of Engineering from Memorial University of Newfoundland, a Master of Business Administration from the University of Ottawa and holds the Canadian Investment Manager designation from the Canadian Securities Institute.