What is Authorized Stock?
Authorized stock, also known commonly as authorized shares or authorized capital stock, is the maximum number of shares a corporation can legally issue as specified in its articles of incorporation (U.S.) or company’s charter (globally). This figure is a critical part of a company’s financial and operational blueprint, indicating the ceiling of potential equity a company can distribute amongst investors.
How It Fits In Corporate Structure
Authorized stock forms part of the broader equity framework of a company, delineating the upper limit of share issuance. It’s a ceiling figure, under which floats the number of outstanding shares — those shares that are actually issued and currently held by investors. These outstanding shares are the active players in the stock market, affecting market capitalization and investor returns daily.
Notable Distinctions
It’s crucial not to confuse authorized stock with other types of stock categories:
- Issued Stock: Shares that have been issued by the corporation but may include shares that are held internally.
- Outstanding Shares: Shares in the hands of the public and internal stakeholders actively involved in market transactions.
Why Not Issue All Authorized Shares?
Companies often issue fewer shares than authorized for several reasons:
- Future Capital Needs: Reserving shares allows a company to raise capital in the future through new stock issuances without the need to amend its charter.
- Control Considerations: By not distributing all shares, founding entities or predominant owners can retain control without risking a takeover from external shareholders.
- Employee Incentives: Stock options for employees can be set aside from the unissued authorized stock.
Example from the Corporate World
Consider a technology giant like Amazon. Its corporate structure and charter might allow the issuance of billions of shares, but by keeping a substantial amount unissued, Amazon retains the flexibility to maneuver financially (issue new shares for acquisitions or investments) or strategically (enhance employee compensation packages).
Potential Drawbacks
The primary risk associated with authorized but unissued stock is the potential for dilution. If a company decides to issue a large number of additional shares, existing shareholders might see their ownership percentage decrease, possibly diminishing their voting power and economic benefits.
Related Terms
- Treasury Shares: Shares that were issued but were bought back by the company.
- Market Float: The regular shares available for trading by the public.
- Equity Capital: Funds raised by the company in exchange for shares of stock.
Further Reading
For those looking to deepen their understanding of corporate shares and capital structure, the following books are highly recommended:
- Corporate Finance by Jonathan Berk and Peter DeMarzo
- The Essays of Warren Buffett: Lessons for Corporate America by Warren Buffett and Lawrence Cunningham
- Security Analysis by Benjamin Graham and David Dodd
From the passageways of power in corporate boardrooms to the bustling trades on Wall Street, authorized stock represents a pivotal concept that underpins much of today’s corporate finance strategies.
