The following is a representation of the steps that corporations must take in order to sell their common stock to the public, as well as what may happen to that stock once it has been sold to the public.
Authorized stock is the maximum number of shares that a company may sell to the investing public in an effort to raise cash to meet the organization’s goals. The number of authorized shares is arbitrarily determined and is set at the time of incorporation. A corporation may sell all or part of its authorized stock. If the corporation wants to sell more shares than it’s authorized to sell, the shareholders must approve an increase in the number of authorized shares.
Issued stock is stock that has been authorized for sale and that has actually been sold to the investing public. The total number of authorized shares typically exceeds the total number of issued shares so that the corporation may sell additional shares in the future to meet its needs. Once shares have been sold to the investing public they will always be counted as issued shares regardless of their ownership or subsequent repurchase by the corporation. It’s important to note that the total number of issued shares may never exceed the total number of authorized shares.
Additional authorized shares may be issued in the future for any of the following reasons:
- Pay a stock dividend
- Expand current operations
- Exchange common shares for convertible preferred or convertible bonds
- To satisfy obligations under employee stock options or purchase plans
Outstanding stock is stock that has been sold or issued to the investing public and that actually remains in the hands of the investing public.
XYZ corporation has 10,000,000 shares authorized and has sold 5,000,000 shares to the
public during its initial public offering. In this case there would be 5,000,000 shares of stock issued and 5,000,000 shares outstanding.
Treasury stock is stock that has been sold to the investing public, which has subsequently been repurchased by the corporation. The corporation may elect to reissue the shares or it may retire the shares that it holds in treasury stock. Treasury stock does not receive dividends nor does it vote.
A corporation may elect to repurchase its own shares for any of the following reasons:
- To maintain control of the company
- Increase earnings per share
- To fund employee stock purchase plans
- To use shares to pay for a merger or acquisition
To determine the amount of treasury stock, use the following formula:
|Issued stock – outstanding stock = treasury stock|
If in the case of XYZ above the company decides to repurchase 3,000,000 of its own shares then XYZ would have 5,000,000 shares issued, 2,000,000 shares and 3,000,000 shares of treasury stock.
It’s important to note that once the shares have been issued, they will always be counted as issued shares. The only thing that changes is the number of outstanding shares and the number of treasury shares.
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