This article aims to clear 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 smile in your face.
Let us present the following different types of 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 makes amendment to its memorandum of association. Generally, majority votes of shareholders can amend memorandum of association. Companies normally maintain higher number of authorized shares than the issued shares. This is because companies can easily raise additional funds in needs by issuing the shares of stock.
Shares separated for sale out of authorized shares are issued share. In other terms, shares of stock exercised by company are issued shares. It includes the Treasury Stocks, which is stocks repurchased by the company, plus the outstanding shares, shares held by investors. That means issued shares equal outstanding shares plus treasury shares. But, 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.
These are number of 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 public. Outstanding shares do not include treasury stocks. The outstanding shares are important to calculate various financial metrics like market capitalization, earning per share, etc.
Company issues these types of shares to individuals in exchange for services and labor provided for the establishment or formation of company. Differed shares or founder shares are the alternative name of promoter’s shares. This form of shares are liable only for residual assets of 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 kinds of agreement between parties, the allocation of shares takes place on the basis of quantum meruit (reasonable value of services performed or as much as he deserved).
Insiders or officers of a company own this types of shares, which are subject to some sorts of sales restriction. After merger and acquisition, and underwriting; company distributes these types of shares. Moreover, company distribute these types of shares to affiliate ownership so as to stop the premature sale of that share which may have the adverse effect on a company.
Treasury Stock or Reacquired Stock
It is share held in corporation or company’s treasury. The purposes of treasury stocks are to prevent takeover threat by increasing the controlling interest, to increase the valuation of stock, to provide extra cash should company needed, etc. Under subscription of issued shares at first place create the treasury stock. That means, by not selling all the issued shares, a company can crease treasury stocks. Also from buyback and purchase out of existing shareholders on the open market, company creates this types of stock. Such an action reduces the outstanding shares.
Moreover, a company can create the treasury stocks through donation and forfeiture. Note that the shares that a company has not issued even though it can do so is not a part of treasury stock, but it is unissued stocks. The treasury stock is regarded as personal property of the company and can sell for cash or credit. The treasury stock does not pay dividend and does not have the voting right and, thus, always excluded from the calculation of outstanding shares.
Company provides this type of share to its existing shareholders in place of cash dividend. By providing bonus share, company converts its earning to be distributed to its shareholders to shares. Shareholders do not have to pay for bonus share to obtain, company freely make them available. However, sometimes bonus shares are subject to tax liability burn by shareholders themselves. Stock dividend is the alternative term for bonus share.
Right Shares are similar to bonus shares except existing shareholders have to pay for right shares to obtain them. Company sells its shares at par value to its existing shareholders. If the existing shareholders under-subscribe the issued right shares, then company auctions remaining shares to the general investors.
If you like this post and want to know about efficient market hypothesis, then read this article.