Subscribed stock definition
/What is Subscribed Stock?
Subscribed stock is an equity instrument that has been purchased under the terms of a periodic payment plan. This approach is most commonly used for employee stock purchase plans, where a deduction is taken from an employee's paycheck and placed in a stock purchase fund. Once the cumulative amount of this deduction is sufficiently large, it is used to buy shares issued by the employer.
Example of Subscribed Stock
A startup company issues new shares of its stock to investors under a periodic payment plan, for which the terms are as follows:
Subscription Agreement Terms: Investors agree to purchase 1,000 shares at a price of $10 per share. Instead of paying the full $10,000 upfront, they subscribe to a plan allowing them to pay in installments over 12 months.
Payment Plan Details:
Initial payment: 20% of the total amount due ($2,000).
Remaining balance: $8,000 to be paid in equal monthly installments of $666.67 over the next 12 months.
Ownership Rights:
Investors may receive partial ownership and limited rights (including dividends, if declared) as they pay, but they will not have full ownership rights until the final payment is made.
The shares are fully issued to the investor upon the completion of payments.
Presentation of Subscribed Stock
A corporation that uses subscribed stock presents a Common Stock Subscribed line item on its balance sheet, which is positioned in the equity section. This line item contains the amount of the shares that have been committed to by subscribers, but not yet paid for. There is also a contra-equity account that is paired with this line item containing the amount still owed by subscribers before their commitments are fulfilled. The net amount may be presented on the balance sheet as a single line item.
Advantages of Subscribed Stock
Subscribed stock has several advantages for the investor. There is no stockbroker commission, and the issuer may offer the shares at a small discount from the market price. This approach also works well for the issuer, since it has a ready source of funds, though the amount it collects from stock subscriptions is generally relatively low.
Disadvantages of Subscribed Stock
A business that sells shares through stock subscriptions tend to find itself with a large number of small shareholders, each of which must be sent the annual report and proxy statements. The result is a relatively high mailing cost for the investor relations department.