This article aims to clarify related but, to some extent, confusing different types of shares. We hope our effort to help you understand what the different terms refer to brings a smile to your face.
Let us present the following different types of shares:
Authorized Shares
These are the maximum number of shares specified in a company’s memorandum of association. Companies can legally issue authorized shares. A company cannot have more shares than the authorized number unless it amends its memorandum of association. Generally, the majority of shareholders’ votes can amend the memorandum of association. Companies usually maintain a higher number of authorized shares than the issued shares. This is because companies can quickly raise additional funds by issuing stock shares.
Issued Shares
Shares separated for sale out of authorized shares are issued shares. In other terms, shares of stock exercised by the company are issued shares. It includes the Treasury Stocks, which are stocks repurchased by the company, plus the outstanding shares held by investors. That means issued shares equal outstanding shares plus treasury shares. However, the issued shares do not include the retired stocks. If either all the treasury stocks are retired or there are no treasury stocks, then the issued shares equal the outstanding shares.
Outstanding Shares
These are several shares of stock currently held by the investors or shareholders. The outstanding shares include (stocks presently held by investors) restricted shares held by the company’s officers and insiders, promoters’ shares, and shares held by the public. Outstanding shares do not include treasury stocks. Outstanding shares are important for calculating financial metrics like market capitalization, earnings per share, etc.
Promoters’ Shares
The company issues these types of shares to individuals in exchange for services and labor provided for the establishment or formation of the company. Differed shares or founder shares are the alternative names of promoter’s shares. This form of shares is liable only for the residual assets of the company after settling all other claims for other types of shares.
The valuation of services rendered is convertible into shares of stock depending on the agreement between the parties, especially shareholders. In the absence of any agreement, the allocation of shares takes place based on quantum meruit (reasonable value of services performed or as much as he deserved).
Restricted Shares
Insiders or officers of a company own these shares, which are subject to sales restrictions. After mergers, acquisitions, and underwriting, the company distributes these types of shares. Moreover, the company distributes these types of shares to affiliate owners to stop the premature sale of that share, which may harm the company.
Treasury Stock or Reacquired Stock
It is a share held in a corporation or company’s treasury. The purposes of treasury stocks are to prevent takeover threats by increasing the controlling interest, to increase the stock valuation, to provide extra cash should a company need it, etc. The under-subscription of issued shares creates the treasury stock in the first place. That means that by not selling all the issued shares, a company can increase treasury stocks. Also, the company creates this type of stock from buybacks and purchases from existing shareholders on the open market. Such an action reduces the outstanding shares.
Moreover, a company can create treasury stocks through donations and forfeiture. Note that the shares a company has not issued, even though it can do so, are not a part of treasury stock but are unissued stocks. The treasury stock is regarded as the company’s personal property and can be sold for cash or credit. The treasury stock does not pay dividends or have voting rights and, thus, is always excluded from calculating outstanding shares.
Bonus Shares
The company provides this type of share to its existing shareholders in place of cash dividends. By providing bonus shares, the company converts its earnings to be distributed to its shareholders’ shares. Shareholders do not have to pay for bonus shares to obtain them; the company freely makes them available. However, sometimes, bonus shares are subject to tax liability burn by shareholders themselves. Stock dividend is the alternative term for bonus shares.
Right Shares
Right shares are similar to bonus shares, except existing shareholders have to pay for them to obtain them. The company sells its shares at par value or with the premium added to its existing shareholders. If the existing shareholders under-subscribe to the issued right shares, then the company auctions the remaining shares to general investors.
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