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Replies to post #58373 on Anavex Life Sciences Corp (AVXL)
04/06/16 5:14 PM
BREAKING DOWN 'Authorized Stock'
The number of authorized shares is typically higher than those actually issued, which allows the company to sell more shares if it needs to raise additional funds. For example, if a company had 1 million authorized shares, it might only sell 500,000 of the shares during its IPO. That would leave 500,000 shares unissued. The company might distribute some as stock options to attract and retain employees. It might sell others in a secondary offering to raise more money in the future. Another reason a company might not want to issue all of its authorized shares is to maintain a controlling interest in the company and prevent the possibility of a hostile takeover.
Amazon’s corporate charter, for example, states the company’s total authorized stock shall include 5 billion shares of common stock and 500 million shares of preferred stock. The charter permits Amazon to increase its authorized stock if there isn’t enough unissued common stock to allow the conversion of preferred stock. Corporate charters often require shareholder approval to increase the number of shares of authorized stock
The number of authorized shares is useful information for company management, but has no relevance for investors. You cannot access authorized shares until they start trading. A company may apply for an increase to its authorized stock if it needs to raise additional capital either for operations or for strategic acquisitions. The outstanding share count changes when a company issues new shares or repurchases existing shares. These changes can affect the stock price and thus the value of investment portfolios. For example, if a company issues new shares to pay off long-term debts or to raise funds for building new stores, investors might bid up the stock price in expectation of higher profits. However, if the company is issuing new stock to fund an acquisition, the stock price may fall in the near term because of share dilution.
Repurchases and Splits
Companies sometimes repurchase stock as a way of returning cash to shareholders. The repurchased shares either are retired or are recorded in a separate treasury stock account if the company intends to reissue them later. The number of outstanding shares is equal to the number of issued shares minus treasury shares. Companies may also announce stock splits to make the shares more affordable for individual investors. Stock splits increase the share count and reduce the share price. For example, a 2-to-1 stock split would double the outstanding stock and reduce the share price by about 50 percent. The company may have to increase the authorized stock. Reverse stock splits reduce the outstanding stock but increase share prices. Stock splits and reverse splits have no immediate effect on the total value of the shares in your portfolio.
Acquisitions
The authorized and outstanding share counts change when a company uses stock to acquire another company. Investors receive shares in the acquiring company or in a brand new company. The legacy shares of one or both companies are retired. The companies would amend their articles of incorporation to reflect the new share structure of the merged entity.
