The difference between authorized and outstanding shares
/What are Authorized Shares?
Authorized shares are the number of shares that a corporation is legally allowed to issue. The number of authorized shares is initially set in a company's articles of incorporation. The shareholders can increase the number of authorized shares at any time at a shareholders meeting, as long as a majority of shareholders vote in favor of the change.
What are Outstanding Shares?
Outstanding shares are issued shares currently held by investors. Their number increases when a company issues stock through a private placement, public offering, stock-based payment, or the exercise of options or warrants. Outstanding shares decrease when the company repurchases shares and classifies them as treasury stock. During an initial public offering, the company and its lead investment bank determine the number of shares offered based on valuation, financing needs, investor demand, and the proposed offering price.
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Comparing Authorized and Outstanding Shares
Here are the key differences between authorized and outstanding shares:
Purpose. Authorized shares represent the total pool of shares a company can issue but may not have issued yet, while outstanding shares represent the shares that are currently in circulation and owned by investors.
Ease of change. It is difficult to change the number of authorized shares, since this requires shareholder approval, while companies may routinely alter the number of outstanding shares through stock sales, buybacks, or stock option issuances.
Impact on market capitalization. The number of authorized shares has no direct impact on market capitalization, while the number of outstanding shares has a direct impact on market capitalization (since capitalization is derived from the number of outstanding shares multiplied by the market price per share).
Authorized and Outstanding Shares FAQs
What happens to unissued authorized shares?
Unissued authorized shares remain available for future issuance. They do not affect ownership, voting rights, or earnings per share until they are issued. Companies keep them in reserve for financing, compensation plans, or acquisitions.