What Is the Difference Between Authorized Stock and Issued Stock?

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What Is the Difference Between Authorized Stock and Issued Stock?
What Is the Difference Between Authorized Stock and Issued Stock? (Image: Google Stock Certificate)

Authorized stock and issued stock are terms used to describe the disposition of the total number of shares representing the overall ownership of a given company. When a corporation files its charter with the state in which it is incorporated and applies to the SEC to allow trading in the corporation's stock, the corporation is authorized a total number of shares that represents the ownership of the company. The company then issues (sells) a portion of that authorized stock to the public, and trading in the stock begins.

History

In 1792, two dozen large merchants got together and formed the New York Stock Exchange, the first formal stock exchange in the United States. They had an agreement to meet each day to trade stocks and bonds. From those humble beginnings, the stock market (and the rules governing it) has grown exponentially. The need for a universal corporate structure became apparent early on, as it enabled investors to compare the relative value of one company to the next. Also, it became necessary to find a way for company owners to only sell a percentage of their company on the public stock market while retaining a controlling interest for themselves. Hence, the concepts of authorized and issued stock were born.

Function

Authorized stock represents the total value of a company at the time the company receives its charter. For example, if a company is worth one million dollars, and the company is authorized to sell one million shares, naturally each share is worth one dollar. Authorized stock is the total number of shares a company is allowed to issue (sell) to the public.

Issued stock is the number of shares in the hands of public entities. The more common term for issued stock is outstanding stock, or shares outstanding. Within the number of issued shares is the public "float." The float is the number of shares outstanding that is readily liquid--in other words, stock in blocks of less than five percent of total outstanding shares, shares that are not restricted and shares that are not held by company insiders.

When a company goes public, the officers of the company decide what percentage of the authorized number of shares in the company to issue to public investors. Once this initial allotment has been sold, it becomes issued stock and begins to trade on the open market.

Types

Another type of stock disposition is important to note relative to authorized and issued stock. When a company decides to buy back shares of their stock on the open market, the repurchased shares become "treasury" stock. The number of treasury shares repurchased reduces the number of issued shares outstanding.

Identification

Shares issued to the public are identified by their alphabetical stock symbols. For stocks trading on the New York or American stock exchanges, these will be three-letter symbols. The NASDAQ uses four-letter symbols to identify companies listed on the NASDAQ.

Considerations

It is important to consider the number of shares outstanding in a company before buying the stock. If a company has millions of shares outstanding but the average daily sales volume is 10,000 shares, the stock isn't going to move much. Conversely, if a company only has a million shares outstanding and has an average daily volume of 200,000 shares, that is a very volatile stock. Also, it is important to consider the number of shares owned by company insiders. As a general rule, greater insider ownership indicates corporate officers who have faith in the company's prospects over the long term.

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