As you dig deeper into the world of investing, you’ll likely run into some advanced terminology that relates to company management. Among these stock terms, you’ll find “issued stock” vs. “outstanding stock,” which distinguishes how many shares a company has compared to the number of shares distributed among investors.
This article will go over the basics of issued stock, authorized stock, and outstanding stock to make this clearer. By understanding these terms, you’ll be better equipped to read stock bulletins and other key pieces of financial news.
What Is Authorized Stock?
Authorized stock refers to the maximum number of shares that a company can sell to its investors. This “ceiling” is determined by the company’s articles of incorporation, which means that the total number of shares is not influenced by market behavior.
Keep in mind that authorized stock simply refers to the number of shares that the company may sell. Authorized stock by itself does not provide a picture of how many shares are currently owned by investors. This figure is known as “issued stock” and, by definition, will never exceed the number of authorized shares.
What Is Issued Stock?
As the name implies, issued stock refers to the shares that have actually been distributed to investors. Typically, this refers to individual investors, though issued stock can also be distributed to large investment institutions.
Issued stock is distributed through all of the usual stock market channels. This issued stock may be purchased through one of the major stock exchanges, and company employees may have stock options that grant them access to company stock at a specified price.
Understanding Authorized Shares vs. Issued Shares
There is a relationship between authorized shares and issued shares. Authorized shares refer to the maximum number of shares that a company may distribute. Issued shares simply refers to the number of shares that have actually been distributed.
When comparing authorized stock vs. issued stock, you’ll discover that they’re closely related, so much so that many stock websites use the terms almost interchangeably.
But there’s one important thing to notice about their relationship. The number of authorized shares must always be equal to or greater than the number of shares of issued stock.
Why? Because the authorized shares represent the maximum number of shares the company may distribute. Said differently, a company may never issue more shares than are authorized.
What Is Outstanding Stock?
Outstanding stock refers to the difference between the number of issued shares and the shares in the company’s treasury.
What is the “treasury?” In this context, the treasury refers to the number of shares that a company buys back from its investors. A company can buy back stock shares and simply retire them, but if it chooses not to retire them, they are recorded as part of the company’s treasury.
Outstanding stock, therefore, is the record of the number of shares that remain in circulation. This number is typically a more accurate representation of the number of shares that are currently held by investors and shareholders since the number accounts for the shares that have been bought back by the originating company.
How to Calculate Outstanding Stock
Outstanding stock can be calculated using the following formula:
Outstanding shares = (Issued shares) – (Shares in the treasury)
For example, imagine that Company X has issued 25,000 shares of stock. At some point down the road, the company buys back 5,000 of those shares. If the company does not retire those shares, it now has 5,000 shares in its treasury.
Using the above formula, we see that the company has 20,000 outstanding shares (25,000 – 5,000).
Comparing Authorized Shares vs. Outstanding Shares
How, then, do authorized shares relate to outstanding shares? Recall that authorized shares represent the maximum number of shares that a company may distribute. This definition means that authorized shares may be higher than the number of issued shares, which are typically greater than or equal to the number of outstanding shares.
We can therefore see that authorized shares represent the upper limit for the total number of shares a company has.
Issued shares represent the number of shares that have been issued, but only outstanding shares provide an accurate picture of the actual number of shares that are in circulation since this figure takes into account treasury shares.
What Is the Difference Between Issued and Outstanding Stock?
Our definitions above provided a clear distinction between shares issued vs. outstanding. The two categories overlap, but outstanding shares will always represent the number of issued shares minus the shares in the company’s treasury.
Beyond these initial definitions, there are some other distinctions that can be highlighted. These include:
Companies will not report issued shares on their financial statements. They will, however, include outstanding shares on their financial statements and use this data for evaluating their financial performance.
Outstanding shares are helpful for evaluating the company’s overall financial performance. This evaluation includes finding key ratios on a per-share basis. Issued shares are not used for this, as they are less relevant than the actual number of shares in the hands of investors.
It’s important to understand that treasury stock has no voting power. Since issued stock includes treasury stock, the total issued stock has no real bearing on voting power.
Outstanding shares represent the total number of shares available for voting. They can also be used to calculate the percentage of shareholding for each individual and assess their voting rights.
Issued vs. Outstanding Stock: Why It Matters
Individual investors are unlikely to use these terms in a direct way, but that doesn’t mean that corporate changes won’t impact your individual portfolio.
For instance, if a company issues new shares or repurchases existing shares, this impacts the outstanding share count. Such changes can affect the stock price, which likewise changes the value of individual investment portfolios.
If you’re looking for a way to predict this, simply look for large-scale corporate changes, such as:
The number of outstanding shares can change during a corporate acquisition, where the shares of one (or even both) companies are retired. Once the dust settles from the acquisition, the company may issue new shares, but by this time, the value of the shares has been destabilized by the merger.
Similarly, stock splits can occur when a company wants to make the shares more affordable to individual investors. In a 2-to-1 stock split, the total number of shares would double. This doubling, in turn, would reduce the individual share price by 50%.
Conventionally speaking, stock splits don’t impact the total value of the company; they just change the value of individual shares. But this can make company stock more affordable to casual investors, and this increased activity can affect the value of the stock.
Issued vs. Outstanding vs. Authorized Shares: The Bottom Line
- Authorized stock refers to the maximum number of shares a company may issue
- Issued stock refers to the actual number of shares that have been issued
- Outstanding stock refers to the number of issued shares, minus the treasury shares
Outstanding shares are useful for evaluative purposes, as they provide the most accurate snapshot of the shares a company has in circulation.
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