Definition
Authorized Stock refers to the maximum quantity of shares a company legally has the right to issue. This number is explicitly stipulated in the company’s bylaws or articles of incorporation. It differs from issued stock, which are the shares the company has actually given out to shareholders.
Phonetic
The phonetic spelling for “Authorized Stock” is: ô-thə-rīzd stŏk.
Key Takeaways
- Definition: Authorized Stock refers to the maximum number of shares that a corporation is allowed to issue to shareholders as per its charter. The number of authorized shares is initially established in the company’s articles of incorporation.
- Significance: The number of authorized shares can impact a company’s ability to raise fresh capital, distribute dividends, or execute a stock split. Any changes to this number typically require shareholder approval.
- Variations: An important distinction to remember is between authorized stock and issued or outstanding stock. Authorized stock is the total number of shares a company can issue, while issued or outstanding stock refers to the shares that have been issued to shareholders and are currently held by them.
Importance
Authorized stock refers to the maximum number of shares that a corporation is legally allowed to issue to investors as specified in its corporate charter. This term is important in business/finance because it signifies the corporation’s potential to raise capital. By deciding the authorized shares number, a company sets its potential equity and establishes an upper limit of shares that can be distributed among shareholders without modifying its charter. It gives investors the clarity they need about the equity available, and it also helps manage the ownership dilution. Therefore, the authorized stock directly influences the company’s potential for growth and expansion.
Explanation
Authorized stock refers to the maximum number of shares that a corporation can legally issue, as laid out in its corporate charter. This quantity is specified when a company is formed and can only be changed with a vote by the shareholders. The purpose of authorized stock is primarily to limit the number of shares a company can issue to control ownership distribution and to prevent over dilution of existing shareholders’ interests. Hence, it serves as a protective measure for investors, maintaining the value of their investment and preventing dilution of their voting power. Additionally, authorized but unissued shares provide corporations with flexibility in financing. They can be used for raising capital by issuing more shares when necessary without needing to change the corporate charter, for executive compensation in the form of stock options, for making acquisitions paid in stock, or as a defense against potential takeovers. This reserve of authorized but unissued stock thus serves as a valuable tool for strategic planning, financial management, and capital formation for businesses.
Examples
1. Alphabet Inc.: The parent company of Google, Alphabet Inc., is an example of a company with authorized stock. As of their 2020 annual report, Alphabet Inc. disclosed that they are authorized to issue up to 9,000,000,000 shares of Class B Common Stock. However, only a fraction of these shares are issued and outstanding, indicating that Alphabet Inc. has the right to sell additional shares in the future. 2. Apple Inc.: Apple, one of the biggest companies in the world, discloses in their annual reports the number of authorized shares they have. During their 2020 annual shareholders meeting, Apple announced an increase in the authorized share count from 12,600,000,000 to 50,000,000,000 shares. 3. Amazon.com, Inc.: Amazon is a prime example of a corporation with authorized stock. According to their 2020 Annual Report, they are authorized to issue up to 5,000,000,000 shares of common stock. Nonetheless, Amazon has issued just over 500 million shares, giving them plenty of room to issue and sell more shares for raising capital if necessary.
Frequently Asked Questions(FAQ)
What is authorized stock?
What is the purpose of authorized stock?
How is authorized stock different from issued stock?
Can a company change the number of authorized stock?
Are all authorized stocks issued to shareholders?
Can a company issue more stocks than the authorized limit?
How can I find out the number of a company’s authorized stock?
Does a higher number of authorized stocks increase a company’s value?
Related Finance Terms
- Par Value
- Issued Shares
- Outstanding Shares
- Common Stock
- Preferred Stock
Sources for More Information
