Whether you plan to set up your own company or invest in a company's shares, you must be able to understand each item in a company's financial statement, as each one impacts the company’s net income. In this case, outstanding and authorized stocks will help you determine a company’s earnings per share, which is a good indicator of the possible returns of your investment.
When a company incorporates, it files the maximum number of shares that it wants to issue. Companies usually apply for more shares than they need so that they can have more flexibility. It's also a good way to avoid the hassle of calling for a shareholder’s meeting and having to file articles of amendment. Once the number of authorized shares has been included in the charter, the company may only change this with the approval of its shareholders. The corporation’s charter includes the par value, number of authorized shares and the types of stocks it can issue.
When a corporation sells its authorized shares, the shares become issued shares. Corporations sell their authorized stock to gain access to cash or capital. They use this capital for mergers and acquisitions, financing projects, gaining access to services, and other business activities. Issuing shares of stock makes it easier for corporations to acquire funds as compared to partnerships and single proprietorships that usually have no other recourse but to borrow from banks. Corporations issue shares of stock based on their par values.
Once a company issues stock, it has the option to reacquire, or buy back, its shares. Stock that the company does not buy back is called outstanding stock. In other words, these are stocks that are still held by investors. Reacquired shares become treasury stock. To differentiate, authorized shares are those shares that a company applies for prior to incorporation. These merely represent the limit of the shares that they are allowed to issue to investors. Outstanding stocks, on the other hand, are those that have been sold and issued to investors but have not been reacquired or retired by the company.
Preferred and Common Stock
Outstanding shares consist of preferred and common shares of stock. The type of stock that the company wishes to issue is included in their articles of incorporation. Preferred shareholders get a greater claim to the corporation’s assets. They get a fixed dividend before common-stock shareholders get their cut. This dividend does not change and, thus, comes with a lower risk. However, unlike common shareholders, they get no voting rights. If the corporation goes bankrupt, preferred shareholders get the first pick at the assets left over after liquidation.