The maximum number of shares a corporation is legally permitted to issue
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What is Authorized Stock?
Authorized stock or authorized shares refer to the maximum number of shares a corporation is legally permitted to issue according to its corporate bylaws. The product of the number of authorized shares and the face value per share is referred to as the authorized share capital.
Authorized shares are different from outstanding shares. Issued shares are a subset of authorized shares that are issued to the shareholders of the company. Generally, some part of the authorized stock remains unissued. The authorized share capital of the company can be changed by obtaining the approval of its shareholders.
Authorized stock acts as a limiting device to control the ability of the management to issue new shares. In the absence of authorized stock, the management will receive the unrestricted right to issue new shares, which may change the balance of control between shareholders. Such an issue of shares may also shift the balance of profit distribution if the new shares are issued at a price other than the market value.
Summary
- Authorized stock is the maximum number of shares a company can issue according to the constitutional documents of the company.
- Authorized stock plays an important role in acting as a limiting device against the ability of the management to issue additional shares that may alter the balance of control of the shareholders.
- Most companies keep a part of the authorized stock unissued to be distributed to employees on the exercise of stock options and other investors in the event that the company needs additional equity capital.
Importance of Unissued Authorized Stock
Companies need to keep some part of the authorized stock unissued for different reasons:
1. Issue of share options and warrants
From time to time, many companies compensate their employees with the option to participate in the company’s Employee Stock Option Plan (ESOP). In order to issue these shares, which become a part of outstanding shares on exercise of the option by the employees, the company needs to have a sufficient portion of the authorized stock unissued.
2. Need to raise capital at short notice
Issuing new shares is usually the last resort for most companies when they need capital. However, in exceptional circ*mstances, a company might issue additional shares at short notice. Having unissued authorized stock is useful, as the management is not required to go through the process of shareholder approval to increase authorized stock before issuing new shares.
Specific Costs of Increasing Authorized Stock
In most jurisdictions, there are no added costs of increasing the authorized stock apart from the typical cost of holding shareholder meetings and certain transaction costs.
However, in some countries like India, companies are required to pay additional stamp duty to increase the authorized stock. The stamp duty in India ranges from 0.15% to 0.20% of the increase in authorized stock subject to a maximum amount of stamp duty, which varies according to the provincial stamp duty law.
Practical Examples
Apple Inc.
As of Apple Inc.’s latest annual report for the year ended September 30, 2019, the company’s authorized share capital consisted of 12.6 billion common shares of $0.00001 each, of which 4.4 billion common shares of $0.00001 each were issued and outstanding as of the date of the annual report.
The balance of 8.2 billion shares represents unissued shares, which are a part of the authorized stock. The shares of the company can be issued by the management, if necessary.
Amazon.com
As of Amazon.com Inc.‘s latest annual report for the year ended December 31, 2019, the company’s authorized share capital consisted of 5.5 billion shares of $0.01 each. The authorized share capital of the company was further divided into 500 million preferred shares of $0.01 each and five billion common shares of $0.01 each.
Of the five billion common shares, 498 million common shares of $0.01 each were issued and outstanding as of the date of the annual report. The balance of 4.5 billion shares represents unissued shares, which are a part of the authorized stock. The shares of the company can be issued by the management, if necessary.
More Resources
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FAQs
Authorized shares are shares of stock that can be issued by companies to investors. Outstanding shares are shares of stock that have been issued. In other words, authorized shares are the total number of shares that companies can legally issue or sell to investors.
What does it mean to own stock answers? ›
When you own stock, you own a part of the company. There are no guarantees of profits, or even that you will get your original investment back, but you might make money in two ways. First, the price of the stock can rise if the company does well and other investors want to buy the stock.
Which is the best description of authorized shares answer? ›
Authorized shares, or authorized stock, are simply a legally allowed maximum number of shares that a company can issue to investors. The number of authorized shares is specified in the company's articles of incorporation. You can also see the number in the capital accounts section on the balance sheet.
What is a stock answers? ›
a stock answer: a pre-prepared response, a response which is always the same (for a particular type of comment or question) idiom.
What is the difference between authorized and common stock? ›
Common stock or shares of stock can be classified as authorized, issued, or outstanding: Authorized stock is the max amount of shares that a company can issue. Generally, a company will not issue 100% of the authorized stock, so issued stock will be less than the authorized amount.
Is all authorized stock issued? ›
Authorized Shares
You do not have to issue all shares authorized; that way, you have the flexibility to add more shareholders at a later date.
What is a stock answer meaning? ›
A stock answer, expression, or way of doing something is one that is very commonly used, especially because people cannot be bothered to think of something new.
Does owning stock mean you own the company? ›
Stockholders own shares of a company, but the level of ownership may not present the benefits and responsibilities sought after. Most shareholders have no direct control over a company's operations, although some have voting rights affording some authority, such as voting for the board of directors members.
How to turn $5000 into $10000? ›
How can you make $5,000 turn into $10,000? Turning $5,000 into $10,000 involves investing in avenues with the potential for high returns, such as stocks, ETFs or real estate. Another approach is to use the money as seed capital for a profitable small business or side hustle.
How do you solve for authorized shares? ›
Here, the number of issues stocks refers to shares sold by the firm to shareholders. Authorized stocks also comprise shares issued to the public. Thus, the following formula is used for calculation: Authorized Shares = Shares Issued + Yet to be Issued Shares.
Authorized share capital—also known as authorized stock, authorized shares, or authorized capital stock—refers to the maximum number of shares that a company is legally allowed to issue or offer based on its corporate charter.
How many authorized shares should a company have? ›
10 million is the standard number of authorized shares that investors expect to see. Authorized shares provide flexibility for future fundraising and growth. Allocated shares are earmarked for specific purposes like employee stock options.
What do you mean by shares answer? ›
Shares are units of stocks issued by a corporation that represent ownership. They are sold to investors and traders to raise capital for the company.
What is stock answer in one sentence? ›
Stocks are shares in the ownership of a company, or investments on which a fixed amount of interest will be paid. ...the buying and selling of stocks and shares.
What is a stock also known as answer? ›
A stock, also known as equity, is a security that represents the ownership of a fraction of the issuing corporation.
Is it good to increase authorized shares? ›
Companies increase authorized share capital for various strategic reasons. Primarily, it provides flexibility for future growth initiatives, enabling the company to raise additional capital when needed.
What is the purpose of authorized capital stock? ›
Authorized share capital—also known as authorized stock, authorized shares, or authorized capital stock—refers to the maximum number of shares that a company is legally allowed to issue or offer based on its corporate charter.
What is the difference between authorized shares and capital stock? ›
Capital stock, also known as authorized stock, refers to all common stock and preferred stock a corporation is legally allowed to issue. A corporation's charter establishes the amount of shares the corporation may issue, and the board of directors can either issue the maximum amount or retain a portion of the shares.
What does it mean when an order is authorized? ›
All credit card payment providers have an authorization period to allow a charge to be made to a customer's credit card. The authorization process first checks that the credit card is valid, and then that the card has enough funds on it for the transaction. The authorization period ends after a certain amount of time.
