Understanding the difference between authorized stock and issued stock is critical for investors. Here are the basics of authorized and issued stocks.
When a company decides that it wants to raise money by equity financing, it will issue stock to the public. In order to do this, it will have to register with the Securities and Exchange Commission (SEC) and go through an initial public offering. During this time, the company will decide how many shares to create. This is determined by the value of the company. For example, if the company is valued at $1 million and wants to issue 1 million shares of stock, it will have an initial stock price of one dollar per share. The 1 million shares in this company represent the authorized stock.
This is the number of shares that was authorized by the board members and approved by the SEC. The number of shares issued must coincide with the documents that are filed when the stock is released. Therefore, if a company says that it is going to release 1000 shares, it cannot deviate from that number. The only way that you can change the amount of authorized stock is by a vote from the board members in the company. They can decide to issue more stock in the future if they decide that it is in the best interest of the company.
Just because a company decides to authorize a certain amount of shares does not mean that it will actually allow all of those shares to be purchased. Many times, corporations will hold onto some of their own stock and issue only a certain percentage to the public. The number of shares that are issued to the public is referred to as the issued stock.
Why Companies Keep Stock
Companies may decide to hang onto a portion of their stock for a number of different reasons. One of the most common reasons is to prevent a hostile takeover. To avoid this, they will keep at least 51% of the authorized stock so that no one else can end up controlling the company.
Sometimes, a corporation will keep some of its own stock in the treasury in order to provide it to employees. They can issue stock options to employees as part of their benefits package. Whenever an employee wants to cash in her stock options, the company can simply give her some shares out of the treasury.
Companies will also keep some stock on hand in order to easily raise money if need be. By selling these shares, they can avoid having to get a loan.
It can be helpful to know how much of the stock is issued and how much is authorized. If there is a low amount of issued stock, it can affect liquidity. If much of the stock is controlled by the company, this may also affect your investment decision.