Understanding the distinctions between authorized shares, issued shares, and outstanding shares is crucial for grasping the ownership structure of a corporation. Common stock represents ownership in a company, and these three terms help clarify how shares are managed and accounted for.
Authorized shares refer to the total number of shares that a corporation is permitted to sell as specified in its charter. For instance, if a corporation's charter states it can issue a maximum of 20,000,000 shares, this figure represents the authorized shares. It is important to note that this number does not reflect how many shares have actually been sold; it simply indicates the upper limit of shares that can be issued.
Issued shares, on the other hand, are the actual number of shares that have been sold to investors. When a corporation sells shares to the public, those shares become issued shares. This number can be less than or equal to the authorized shares, but it cannot exceed it.
Outstanding shares are the shares that remain in the hands of investors after accounting for any shares that the corporation may have repurchased. The difference between issued shares and outstanding shares is known as treasury stock, which consists of shares that the corporation has bought back from the market. For example, if a company like Apple repurchases some of its shares, those shares are no longer considered outstanding, even though they were previously issued.
To visualize these concepts, imagine concentric circles: the largest circle represents authorized shares, the next smaller circle within it represents issued shares, and the innermost circle represents outstanding shares. This illustration helps clarify that all outstanding shares are issued shares, but not all issued shares are outstanding if some have been repurchased as treasury stock.
In summary, authorized shares set the limit for how many shares a corporation can issue, issued shares reflect the actual shares sold to investors, and outstanding shares indicate the shares still held by investors after any repurchases. Understanding these distinctions is essential for analyzing a company's equity structure and its financial health.