Tuesday, February 19, 2013

5 Kinds of Stock Shares Explained


Dear Investor Juan,

Can you help me on this, i had read a lot of docs but some have contradictory content, so im really confused.

Can you discuss these terms, Im sure a lot of readers would benefit on this.

Authorized Shares 
Outstanding Shares
Restricted Shares


Dear GTT,

This is how I understand these terms.

1. Authorized shares - the maximum number of shares that a corporation can issue (e.g., sell or assign ownership to an individual or entity) without needing further approval from the Securities and Exchange Commission (SEC).

At the corporation's inception, the founders must decide on the number of authorized shares (pretty much arbitrarily) and state it in the Articles of Incorporation.

If at any point the firm wants to issue more shares beyond its number of authorized shares, it can file a request for more authorized shares with the SEC.

2. Outstanding shares - shares that are actually owned by individuals or entities. Corporations don't have to issue all their authorized shares at once, so at any given time a firm would have more authorized shares than outstanding shares.

Sometimes you'll encounter the phrase "issued and outstanding," which pretty much just means "outstanding." The qualification is important only because it distinguishes such shares from those that are "issued and not outstanding," a phrase that refers to...

3. Treasury shares - shares that were bought back by the firm, so had been issued but not owned by anyone anymore.

4. Float - is the term used for shares owned by the investing public and are traded in stock exchanges. "Minimum public float" defines the minimum percentage of outstanding shares that must be listed in the stock exchange; in the Philippines, it's 10%.

5. Restricted shares - shares that are held privately, usually by firm founders and insiders. Restricted shares cannot be sold in the stock exchange without meeting certain predefined conditions. If these conditions are met and restricted stock holders decide to sell their shares to the public, then the sold shares become part of the float.

One good recent example are the restricted shares of Facebook insiders that were only allowed to be sold some months after the Facebook IPO.

In one source, I saw restricted shares defined as outstanding minus float, which makes sense, but I would not be surprised if someone can find a differing definition.

I have come up with this simple graphic to help visualize how these different kinds stock relate to each other.

I know that it's not so clear in the graphic, but FLOAT is the area within OUTSTANDING outside of RESTRICTED.

I hope this helps.

Related Posts Plugin for WordPress, Blogger...