You might be close to investing in a company and want to know the difference between outstanding and authorized stock. You’re in the right place!
It’s something many investors don’t even know about until they are presented with the choice between different types of shares, or are sitting on the other side of the table and trying to take a company public.
If you are in that boat, fret not, because we have all been there. In fact, it signals that you are reaching a fairly advanced level as an investor that you are even beginning to realize there are different stock types. So, what is the difference between these two? In this quick guide, we will explore the definitions and outline some examples.
When a company first legally incorporates, a decision is taken as to the maximum number of shares it may issue.
That’s not to say it will actually issue this number of stocks, but once it is written in ink and the dotted lines are signed, a company will be able to issue that initially agreed upon number of stocks, should it need or want to do so when bringing on board new investors to raise capital.
This is what authorized stock means, plain and simple. It’s the number of stocks a company is authorized to issue.
Larger companies can decide to authorize as many stocks as they wish, while there are some limits in place for smaller firms. The only way to change this number later on is by holding a vote including the current stockholders.
Remember – this is a maximum!
There is absolutely nothing to say the company in question actually has to issue this number of shares, and they may hold back from doing so in order to be able to raise cash later. Which brings us nicely to…
You might have guessed it already, but this is the number of shares a company actually issues or sells to investors.
Many large corporations literally have sold billions of shares, with firms like General Electric having issued tens of billions.
When a company decides to go public, it will engage an investment bank to bring it to market. This is known as an IPO, and the investment bank will set the number of outstanding shares at this point.
One important point to note about outstanding shares is that they differ from issued shares, which are similar, but not exactly the same.
What’s the difference?
Outstanding shares actually remain in the hands of investors, or the public, whereas issued shares can be those which have been bought back by the company at some point.
The latter type have been issued at some point, but this says nothing about which party holds them now.
You could think of outstanding shares as the number of issued shares minus the shares a company has bought back.
Authorized Stock vs Outstanding Stock Example
So, the authorized stock is the total number of shares a company is legally allowed to sell, and the outstanding stock is the number of shares still in the hands of investors.
Here’s an example to illustrate further:
Let’s say a large corporation, such as XYZ Chemical, is allowed to sell 15 billion shares according to its charter.
However, it has currently only sold 13.4 billion, meaning it could still sell 1.6 billion if it needed to raise cash.
In this case there are 15 billion authorized shares, and 13.4 billion outstanding shares.
It’s simple when you think of it like that, isn’t it?
Frequently Asked Questions
Does every company have a maximum number of authorized shares?
Yes, everything from a corporation to a one man show has, as long as it is a legally incorporated business. When the company registers, this is part of the paperwork.
Can a company change the number of authorized shares?
The only way this can be done is by holding a vote among the existing shareholders. This may be done, and they may agree, in times when a company needs to raise extra cash, such as when in financial difficulties.
Remember, a single shareholder might hold all the shares if the company is smaller (which makes the vote extremely easy to win).
Why would a company buy back stocks, as was mentioned in the article?
There are a few reasons this might occur, including the desire among bigger shareholders to consolidate ownership, and for accounting reasons such as boosting financial ratios.
If a company does buy back stocks, those still remain issued, since they were held by the public at some point.
We hope this has been an insightful glimpse into the difference between authorized stock and outstanding stock.
Every company has both, among other types of stock such as preferred and preferential preferred stock. The more you know the better, and if you fully understood this guide, you are another rung higher on the investors ladder.