What are Authorized Stocks?
Authorized stocks or authorized shares are the maximum number of stock that a company is allowed to issue to their potential investors. The number of authorized shares is specified by the company in its articles of incorporation. They are also specified in the capital accounts section of the company balance sheet.
Understanding Authorized Shares
During the formation of a company, the business owners file documents to become registered in the systems of the government through their articles of incorporation. At this time they decide on the maximum number of shares that they would like to offer - these are referred to as authorized shares. The number of shares released into the open market for investors may be a portion of, or all of the company's authorized shares whereas the number of shares that are available to investors to freely trade in is referred to as ‘float’.
Restricted shares are reserved for employee compensations and incentives and they, too, are a part of the number of authorized shares. As seen in a company’s balance sheet - the total number of a company’s outstanding shares is the sum of the float shares and the restricted shares and if the outstanding shares are lesser as compared to the authorized shares then the difference is of the unissued stock which the company chooses to retain in its treasury.
A company that issues its entire lot of authorized shares has a value of outstanding shares equal to the number of their authorized shares but the number of outstanding shares can never exceed the authorized shares as the authorized shares suggest the maximum number of any type of share a company can offer.
There is no particular requirement or limit for the minimum or a maximum number of shares that a company can authorize. Companies usually choose to authorize shares when going public by offering the equity of a company - usually through an IPO (Initial public offering).
Authorized Stock vs Issued Stock
Issued shares are a piece of the authorized shares pie that is given or issued to various stakeholders instead of being reserved or remaining unissued by the company for potential future use.
Once the amount of authorized stock is decided, it doesn’t instantly become available to the open market or the investors. It is held with the company. The company decides how many shares it would like to give to particular stakeholders such as employees, shareholders, contractors, investors, etc. When these stocks are given out or granted to these particular stakeholders, they are called issued stock. It is not necessary that all of the authorized stock be given out or issued, a particular amount of stock can remain with the company to possibly give out in the future.
Example of Authorized shares:
If you are one of the founders of Company XYZ and are currently planning on expanding its manufacturing operations by either installing another factory plant or expanding the size of its current plant. After diligent research, you and your co-founders agree that setting up a new plant will be a better alternative, for this you will require a sum of Rs. 10 crores.
You realize that out of the total authorized shares which amount to 1,00,000 - with a cost of 10,000 rs per share, you have only issued 60,000 shares. Hence to raise the additional sum of 10 crore rupees you will need to issue an additional 10,000 shares. You and the directors now vote unanimously and decide to sell 10,000 of the remaining 40,000 shares. Now your authorized shares remain the same at 1,00,000 but your number of issued shares has increased by 10,000 to 70,000 which has generated another 10 crore rupees to be used in business expansion.
Frequently Asked Questions Expand All
A company may keep a particular part of its authorized shares as reserves to generate capital in the future when they require it in the case of urgency, emergency or expansion.
There is no particular requirement or limit for the minimum or maximum number of shares that a company can authorize. Companies usually choose to authorize shares when going public by offering the equity of a company - usually through the means of an IPO (Initial public offering)
The primary reason behind a company increasing its authorized shares may be to raise additional capital. However, this capital is not raised just by increasing its authorized shares, the shares should be issued to the shareholders as well.