The difference between authorized and outstanding shares
/What are Authorized Shares?
Authorized shares are the number of shares that a corporation is legally allowed to issue. The number of authorized shares is initially set in a company's articles of incorporation. The shareholders can increase the number of authorized shares at any time at a shareholders meeting, as long as a majority of shareholders vote in favor of the change.
What are Outstanding Shares?
Outstanding shares have already been issued. Several activities can increase the number of outstanding shares. For example, shares may be issued by any of the following actions:
A secondary offering
A stock payment
The number of outstanding shares declines when a company buys back shares (which are then known as treasury stock).
When a company goes public, the number of outstanding shares is set by the lead investment bank that is in charge of the initial public offering.
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Comparing Authorized and Outstanding Shares
Here are the key differences between authorized and outstanding shares:
Purpose. Authorized shares represent the total pool of shares a company can issue but may not have issued yet, while outstanding shares represent the shares that are currently in circulation and owned by investors.
Ease of change. It is difficult to change the number of authorized shares, since this requires shareholder approval, while companies may routinely alter the number of outstanding shares through stock sales, buybacks, or stock option issuances.
Impact on market capitalization. The number of authorized shares has no direct impact on market capitalization, while the number of outstanding shares has a direct impact on market capitalization (since capitalization is derived from the number of outstanding shares multiplied by the market price per share).