Question

1). Discuss the difference between authorized shares and outstanding shares. 2). Are there other classifications of shares that are important to consider? 3). What are treasury stocks and why do companies engage in their purchase?

Answer 1

Answer 1)

Authorized shares are the maximum permissible number of shares which a company is allowed to issue to the public or its investors to raise capital. however not all the authorized shares may be issued to the public at any point of time. companies generally keep a reserve of shares and not issued consisting as a part of the total authorized shares to be issued upon necessity.

Outstanding shares are in simple terms the shared help by investors of the company. They are already authorized, issued and purchased by the public and those holding these outstanding shares exercise voting right and in some cases managerial and decision making power if they are included in the board of directors.

Answer 2)

Among the issued shares. There is primarily two broad classification. One as discussed in answer 1 as outstanding shares, the other type being treasury stocks/shares. the prime differenctiating factor between the two are based on the ownership party involved.

Answer 3)

Treasury stocks, similar to outstanding shares are issued and subscribed but instead of being held by the public or investors. they are held by the corporation itself. It is basically those shares which are bough back by the issuing entity. Treasury stocks are not available in the open market including insider investors. Treasury stocks are not eligible to receive any dividends and they do not hold any voting rights. treasury stocks affect cash flow of the company negatively (due to buying back from the market) but it will enhance shareholder value and returns and also improve metrics such as price/earnings ration, making the valuation in the market more positive and share prices less volatile. Inorder to have a good valuation the market needs to be efficient. if the market is inefficient. the effects can be counteractive.