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Authorized Stock: Definition, Example, Vs. Issued Stock

Are you wondering what authorized stock is and how it differs from issued stock? Look no further! In this article, we will provide you with a comprehensive guide to understand the concept of authorized stock, its implications, and how it compares to issued stock.

When talking about corporate finance, it is crucial to understand authorized stock. Authorized stock, also known as authorized shares or authorized capital, represents the maximum number of shares a company can issue. These shares are established by the company’s board of directors and defined in its articles of incorporation or charter.

Authorized stock acts as a limit that regulates the company’s ability to raise capital by issuing shares. This limit is usually set high, allowing the company the flexibility to issue additional shares if needed in the future, without requiring any amendments to its articles of incorporation.

On the other hand, issued stock refers to the shares that a company has actually sold or issued to shareholders. These shares provide ownership in the company and entitle shareholders to certain rights, such as voting rights and dividends. Issued stock can be held by individual investors, institutional investors, or even the company itself.

So, how do authorized stock and issued stock differ?

Authorized Stock vs. Issued Stock:

1. Definition: Authorized stock represents the maximum number of shares a company is allowed to issue, while issued stock refers to the shares that have been initially sold or issued and are currently held by shareholders.

2. Flexibility: The number of authorized shares provides the company with flexibility to issue new shares in the future, whereas the issued shares account for the actual shares that have been issued to investors.

3. Limits: While the number of authorized shares represents the limit, a company can issue, issued shares cannot exceed the authorized shares. If the company wants to issue more shares than the authorized amount, it typically requires approval from shareholders.

4. Dilution: The company’s authorized stock is not diluted by the issuance of new stock until those shares are actually issued or sold. On the other hand, issued stock can be diluted if the company issues additional shares.

5. Legal Compliance: The number of authorized shares needs to comply with the laws and regulations of the jurisdiction where the company is incorporated. Issues with exceeding authorized shares can result in legal complications.

Now that you understand the difference between authorized stock and issued stock, let’s look at an example to illustrate the concept:

Company XYZ has 10,000 authorized shares and has issued 5,000 shares to various investors. The remaining 5,000 shares represent the unissued authorized shares, which the company can choose to issue in the future according to its needs and objectives.

By having authorized stock in place, Company XYZ can easily raise additional capital by issuing the remaining 5,000 shares without going through the legal process of changing its articles of incorporation.

In conclusion, authorized stock is the maximum number of shares a company can issue, authorized by its board of directors. Issued stock represents the actual shares that have been issued to shareholders. Understanding the difference between authorized stock and issued stock is crucial in navigating the world of corporate finance and protecting the rights of shareholders.

We hope this article has provided you with a clear understanding of authorized stock, issued stock, and how they differ.