This article aims to clarify related but to some extent confusing, different types of shares. We hope our effort to make 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 the memorandum of association of a company. Companies can issue authorized shares legally. A company cannot have more number of shares than the shares authorized unless it amends its memorandum of association. Generally, majority votes of shareholders can amend the memorandum of association. Companies normally maintain a higher number of authorized shares than the issued shares. This is because companies can easily raise additional funds in need by issuing shares of stock.
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, 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 currently 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 various 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 residual assets of the company after settling all other claims of 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 kind of agreement between parties, 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 types of shares, which are subject to some sort of sales restriction. After merger and acquisition, 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 valuation of stock, to provide extra cash should a company need it, etc. Under subscription of issued shares in the first place create the treasury stock. That means, that by not selling all the issued shares, a company can increase treasury stocks. Also from buyback and purchase out of existing shareholders on the open market, the company creates this type of stock. Such an action reduces the outstanding shares.
Moreover, a company can create treasury stocks through donations and forfeiture. Note that the shares that a company has not issued even though it can do so are not a part of treasury stock, but it is unissued stocks. The treasury stock is regarded as the personal property of the company and can be sold for cash or credit. The treasury stock does not pay dividends and does not have voting rights and, thus, is always excluded from the calculation of 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 shareholder’s 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 the right shares to obtain them. The company sells its shares at par value to its existing shareholders. If the existing shareholders under-subscribe the issued right shares, then the company auctions the remaining shares to the general investors.
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