What A Forfeited Share Means, With Definition And Example

(Many of the links in this article redirect to a specific reviewed product. Your purchase of these products through affiliate links helps to generate commission for LiveWell, at no extra cost. Learn more)

What is a Forfeited Share?

When it comes to corporate finance, there are numerous terms and phenomena that may seem complex or unfamiliar to the average person. Among these is the concept of a forfeited share. But fear not! In this blog post, we will break down the meaning and implications of a forfeited share in simple terms. So, let’s dive in and shed some light on this intriguing concept.

Understanding Forfeited Shares

A forfeited share refers to a share of stock that is returned to the issuing company because the shareholder has failed to fulfill certain obligations. These obligations can vary but often include requirements such as timely payment for the shares or adherence to specific contractual terms agreed upon at the time of purchase.

Imagine a scenario where an individual decides to invest in a company by purchasing shares. Let’s call this person John. John is excited about the prospects of the company and decides to buy 100 shares. However, after receiving the shares, John fails to make the necessary payment within the agreed timeframe. As a result, the company deems his shares forfeited.

For example, let’s say John purchases 100 shares in XYZ Corporation at $10 per share, amounting to a total investment of $1000. The terms of the purchase agreement state that John must make the payment within 30 days. However, John fails to make the payment by the due date, causing his shares to forfeit. As a consequence, the company cancels the shares and returns them to the pool of available shares.

It’s important to note that forfeited shares usually occur when shareholders fail to pay the required amount for the shares or breach specific contractual terms. In such cases, the company has the right to cancel and reissue those shares to other interested investors.

The Implications of Forfeited Shares

For a company, forfeited shares have both practical and financial implications. Let’s take a look at some of the key implications:

1. Cancellation of Share Certificates: When a share is forfeited, the company cancels the share certificate previously issued to the shareholder. This ensures that the forfeited shares are no longer recognized as valid ownership stakes.
2. Reissuing of Shares: The company can now reissue the forfeited shares to new investors or existing shareholders, providing them with an opportunity to purchase additional shares or increase their ownership stake in the company.

In addition to the practical implications, forfeited shares also have financial implications for both the company and the forfeiting shareholder. From the company’s perspective, forfeited shares can result in a loss of anticipated capital and potential dilution of ownership. For the shareholder, the forfeiture means the loss of their initial investment along with any potential future gains that could have been made through the ownership of those shares.

So, the next time you come across the term “forfeited share” in the realm of finance, you’ll have a clear understanding of what it means. Forfeited shares are those shares that are returned to the issuing company due to the shareholder’s failure to meet certain obligations, such as payment or adherence to contractual terms. Understanding this concept can help you navigate the intricacies of corporate finance with confidence.