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Forfeited Share

Forfeited shares are differentiated from cancelled, repurchased and retired shares. Cancelled shares are cancelled, but not reissued; instead, they cease to exist. Repurchased shares are bought back by the company, and the funds become part of the company’s retained earnings; oftentimes, repurchased shares are used as part of a stock buyback plan. On the other hand, retired shares cease to exist, usually coming from a shareholder’s estate when stock transfers to heirs.

Forfeited shares are common in various financial arrangements, such as employee-stock-option plans and warrants. In an employee stock option plan, for example, employees are given the option to purchase company stock at a predetermined price and during a certain timeframe. If the timeframe lapses before the employee exercises the option, the option is forfeited and the company regains the unvested stocks.

Warrants are another common example of forfeited shares. A warrant is a financial instrument typically used in merger and acquisition (M&A) transactions that allows the buyer of a company to purchase stock at a predetermined or discounted price. If the buyer does not exercise the warrant, it is forfeited and the issuing company regains the unexercised shares.

In some cases, such as when a company establishes a stock repurchase program, the issuing company uses forfeited shares to acquire additional shares without adversely affecting the value of the outstanding shares. The issuing company can then use the shares to buy back additional shares, keeping the company’s outstanding shares static and increasing the company’s per-share market value.

In conclusion, forfeited shares are shares in a publicly traded company that an owner relinquishes or fails to honor for some reason. These shares are different from cancelled, repurchased and retired shares, as they typically revert back to the issuing company, which reissues them at a discounted price. Forfeited shares are a common occurrence in arrangements such as employee-stock-option plans and warrants, used in M&A transactions. Companies can also use the bonus shares they gain from forfeited shares to accumulate more of their own stock to help increase the company’s per-share market value. Investment professionals should make sure to research the company they are investing in to determine the number of forfeited shares they have, to fully understand the stock’s value.

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