Authorized Stock
Candlefocus EditorAuthorized stock serves as an essential tool in setting up a firm’s stock structure. Companies set their authorized stock as part of their business plan to give investors an idea of the amount of shares that can be offered to the public. If a company’s authorized stock is too low, investors may be reluctant to invest in the company.
The difference between authorized stock and outstanding stock, is the number of shares retained in the company’s treasury. Outstanding stock are those which have been issued to the public, while authorized stock is the maximum number of shares that have been allocated for future distribution by the company.
The company’s shareholders have the right to buy or sell shares of its stock. Because of this, it is important for the company to maintain flexibility in the amount of shares it has available in its treasury to ensure that it can respond to shareholders’ demands. At the same time, a company must also maintain enough shares in its treasury in order to use them as incentives to recruit employees or as a way to ensure that its board of directors remains in control of the company.
Authorized stock has several important implications that should be considered before issuing stock. One of these is that it provides the company the flexibility to increase or decrease the number of available shares on the market. This gives the company the ability to respond to various market conditions or company needs such as providing incentives to new employees or investing in new projects. However, companies must also keep in mind that changes to authorized stock also require approval of the board of directors and, depending on jurisdiction, also from a government regulatory agency.
At the same time, shareholders must also be aware of the amount of authorized stock when deciding whether or not to invest in a company. A company with a too-low an authorized stock level may have difficulty providing investors with enough shares to meet their demands. In these cases, investors may be unwilling to invest in the company and its stock may be less valued than comparable stocks with higher authorized stock levels.
Ultimately, authorized stock is an important tool in setting up a company’s stock structure and allows the company to respond to different market forces or company needs. Companies should think carefully when allotting their authorized stock and understand how it may affect the company and its shareholders. Investors should also pay close attention to the company’s authorized stock levels when deciding whether or not to invest in a specific company. With the right decision, companies and investors can benefit from their understanding of authorized stock.