What is an 'Authorized Stock'
The maximum number of shares that a corporation is legally permitted to issue, as specified in its articles of incorporation. Authorized stock, also known as “authorized shares” or “authorized capital stock,” is also usually listed in the capital accounts section of the balance sheet. Authorized shares should not be confused with outstanding shares, which are the number of shares the corporation has actually issued that are held by the public.
BREAKING DOWN 'Authorized Stock'
The number of authorized shares is typically higher than those actually issued, which allows the company to sell more shares if it needs to raise additional funds. For example, if a company had 1 million authorized shares, it might only sell 500,000 of the shares during its IPO. That would leave 500,000 shares unissued. The company might distribute some as stock options to attract and retain employees. It might sell others in a secondary offering to raise more money in the future. Another reason a company might not want to issue all of its authorized shares is to maintain a controlling interest in the company and prevent the possibility of a hostile takeover.
Amazon’s corporate charter, for example, states the company’s total authorized stock shall include 5 billion shares of common stock and 500 million shares of preferred stock. The charter permits Amazon to increase its authorized stock if there isn’t enough unissued common stock to allow the conversion of preferred stock. Corporate charters often require shareholder approval to increase the number of shares of authorized stock.
One reason an investor might want to know how many authorized shares a company has is to analyze the potential for stock dilution. Dilution reduces a stockholder’s share of ownership and voting power in a company and reduces a stock’s earnings per share when new stock is issued. The larger the difference between the number of authorized shares and the number of outstanding shares, the greater the potential for dilution.