Authorized Shares vs. Outstanding Shares:An Overview
Authorized shares and outstanding shares are issued by companies but there's a distinct difference between the two. Authorized shares are the total number of shares that companies can legally issue to their investors. Outstanding shares are any shares that are held by all shareholders.
Key Takeaways
- Authorized shares are the maximum number of shares a company is permitted to issue to investors as laid out in its articles of incorporation.
- Outstanding shares are the actual shares issued or sold to investors from the available number of authorized shares.
- A company may intentionally not issue shares as a defensive maneuver to reduce the possibility of a hostile takeover or the loss of internal majority ownership.
- A company may also hold reserve shares that are authorized but not outstanding until they're included in stock option plans or redeemed through third party warrants.
Authorized Shares
Authorized shares are defined as the maximum number of shares that a company is legally allowed to issue to investors as per its own determinations. The maximum number is established in a company's legal formation documents known as its articles of incorporation. Authorized shares are also referred to as authorized stock or authorized capital stock.
There's no limit as to the total number of shares that can be authorized within these documents for a larger company but smaller companies that don't plan to expand or that have a set number of shareholders are limited as to the number of authorized shares they can designate. The articles of incorporation may authorize one share or millions of shares for a company that doesn't have an authorized shares restriction.
The number of shares that are available to trade is referred to as thefloat. There are alsorestricted shares that are part of a company's authorized shares. These shares are set aside for employee compensation and incentives. The total number of a company's outstanding sharesas seen in the balance sheet is the sum of float and restricted shares.
The number of authorized shares can be changed by a vote from shareholders, typically during the annual shareholder meeting.
Outstanding Shares
Shares that are issued or sold to investors from the available number of authorized shares are known as outstanding shares. The number of outstanding shares is set by the investment bank that implements a company’s initial public offering (IPO) but the number can change.
A secondary stock market offering can increase the number of outstanding shares, as can the payment of employee stock options (ESOs). Outstanding shares decrease when a company repurchases its own stock. The total number of outstanding shares can't be greater than the total number of authorized shares as laid out in a company's articles of incorporation.
Understanding the difference between authorized and outstanding shares allows for more accurate calculations of financial ratios for investors. Using outstanding shares to determine earnings per share (EPS) could result in inflated gains. Using authorized shares may drastically offset a realized loss.
Investors should have a strong understanding of these underlying terms to make correct calculations on a company’s financial stability and performance.
Outstanding shares represent ownership of the company. Holders of outstanding or issued shares typically have voting rights and dividend distributions when applicable.
Special Considerations
The number of outstanding or issued shares is always equal to or less than the total number of authorized shares. Companies often intentionally keep these two figures different so the organization has the flexibility to sell more shares in the future should it have financing needs.
Companies may also intentionally hold back authorized shares as a defensive maneuver. The company can maintain a controlling interest by retaining authorized shares. It can also reduce the possibility of a hostile takeover if a majority of shares have yet to be issued.
Authorized shares that have not yet been issued may be intentionally set aside as reserved shares. Reserved shares can be used by the company as part of future stock option plans. These reserve shares may not be issued unless it's done under the stock option plan. Reserved shares can also be issued via stock warrants to a third party.
Examples
One of the best ways to understand how authorized and outstanding shares work is through real world examples.
Authorized Shares
Apple (AAPL) was incorporated in 1997 but the company has amended its Articles of Incorporation many times since. According to an amendment filed on Aug. 3, 2020, Apple indicated that it is "authorized to issue one class of shares." These shares fall under its common stock. The total number of shares was 50.4 billion. The filing also indicated that existing shares would automatically be split into four.
Outstanding Shares
You can find the total number of shares outstanding for any company in a few ways.
- Go to the company's investor relations website. Microsoft (MSFT) answers a question on its FAQ about how many shares it has outstanding. There were almost 7.5 billion shares outstanding as of July 24, 2023.
- Check financial websites or stock exchanges.
- Look at financial regulatory body databases such as the Securities and Exchange Commission (SEC).
What Is the Difference Between Authorized Shares and Issued Shares?
Authorized shares are the maximum number of shares that can legally be issued to shareholders. The number is established by the company’s articles of incorporation. Issued shares are the number of shares given to shareholders.
The total number of authorized shares will be greater than the number of issued shares if a company chooses not to issue all its authorized shares. The number of issued shares can't exceed the number of authorized shares.
Can a Company Change Its Authorized Shares?
Yes, a company can change the number of authorized shares it's allowed to issue. Public companies must usually notify existing shareholders and call for a shareholder vote. The measure is then reviewed at the following shareholder meeting. Existing shareholders don't receive any compensation or existing shares by changing the number of authorized shares.
How Do You Calculate Outstanding Shares?
The number of outstanding or issued shares is publicly disclosed through required regulatory filings for public companies. A company must often obtain board approval and record quantities via board meeting minutes whenever it decides to issue or sell additional shares. It must prepare appropriate documentation and ensure compliance with state and federal securities laws.
When Can a Company Issue More Shares?
The company must first have authorized shares that haven't yet been issued or have a plan in place to increase the number of authorized shares if that's not the case. It must then obtain board approval to issue additional shares. Finally, it must be able to comply with state and federal securities regulations for the issuance.
Can a Company Issue More Shares Than Authorized?
No. A company is limited to issuing only the quantity of shares it's authorized to issue. Breach of this limit breaks compliance with securities laws and regulatory agencies will often consider the excessive issuance of improperly authorized shares as void.
The Bottom Line
Understanding stock market terminology allows investors to make appropriate, intelligent decisions. Knowing the difference between authorized shares and outstanding shares is relevant in accurately calculating important ratios that speak to the financial stability of a company. Companies will sometimes keep these two figures different so the organization can sell more shares in the future.
