Updated July 19, 2023
Definition of Shares Issued
The company actively sells issued shares, which constitute a portion of the shares authorized by the company. The company can sell these shares to its shareholders, members, or the general public. The annual report of the company displays these shares. In other words, issued shares encompass the shares sold to the general public to raise capital and the shares allocated to company members as compensation.
Explanation
Three terms are used in this context: Authorized shares, Outstanding Shares, and issued shares. Authorized shares mean the maximum number of stock stated in the Article of Incorporation which a company can issue to its shareholders.
Types of Shares Issued
There are different types of share issues:
- Share Issue: Companies issue shares to both new and existing shareholders, either at their face value (par) or at a premium.
- Bonus Issue: A bonus issue involves issuing additional shares to existing shareholders free of cost.
- Rights Issue: A rights issue gives existing shareholders the opportunity to acquire additional shares in proportion to their current shareholding. The shareholder has the right to acquire the share at a discount or renounce it in favor of another person.
- Scrip Issue: This is a type of bonus issue as the company provides options to its shareholders to accept the dividend in the form of shares and not in cash.
- Share Splits: In this type of issue, the amount of Share capital remains the same, but the company increases the number of shares issued. For example, 2 shares of $5 per share are split into 5share of $2 per share.
- Share Consolidation: In this type of issue, the amount of total Share capital remains the same, but the number decreases by the company. For example: 5 shares of $2 per share are consolidated into 2share of $5 per share.
Shares Issued vs Outstanding
- Issued shares refer to shares that have been sold by the company to shareholders or investors. These shares are allocated to individuals who invest in the company, as well as members of the company as compensation or to the general public. Outstanding shares cannot exceed issued shares, but it becomes equal to issued shares without treasury stock. This amount fluctuates in nature. It increases when a company raises additional capital and decreases when the company reacquires its shares from its shareholders.
- Treasury stock can include shares held by existing shareholders or investors and restricted shares held by the company’s officers or employees.
- For example, let’s consider a company that initially issued 80,000 shares. However, at some point, the company reacquired 5,000 shares from its shareholders. It’s important to note that the company does not cancel these reacquired shares. Therefore, the number of outstanding shares would be 75,000 shares (80,000 – 5,000).
Advantages
The advantages are:
- The company issues shares to raise capital or money for the company. The company uses the proceeds from the sale of shares in the way it wants, and there is no obligation on the company to repay this amount. Still, if the company raises the debt, the company can use this amount with some restrictions, and there is an obligation on the company to repay this amount to the lender in the future.
- The company can raise additional share capital by issuing more shares.
- If the company raises capital by issuing shares and the company is short in cash, it can skip the payment of dividends, but this is not possible in the case of debt.
Disadvantages
The disadvantages are:
- When a company issue shares to its shareholders, they get voting rights. By using these rights, they can change the company’s policies and take part indecisions of management. This will result in a dilution of control by the original owners. They can also take over the company by acquiring more shares from the stock market.
- When a company issues shares to the general public, it has to disclose its financial position and operation details to the general public, which is confidential to the company.
- Suppose a company raises additional capital by issuing shares after the initial public offering. In that case, this will result in a reduction in the price of existing shares or dividend per share, and existing shareholders may become angry and fight for their control.
Conclusion
Issued shares are those allotted to the company’s shareholders out of the authorized shares stated in the legal document that is an article of incorporation. It is more flexible for the company to raise money by issuing shares instead of raising debt, as the company can skip dividends but does not skip the interest in case the company runs short in cash.
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