As every shareholder knows, it is the privilege and right of a company to choose to issue shares of stock. Often, the types of stock that is offered by the company will differ from one another, perhaps in the type of classes that are issued. In order to maintain some degree of consistency with the process, corporations issue what are called authorized shares. Essentially, authorized shares of stock indicate that the number of type of stock that has been issued is within the perimeters of the stock provisions that are contained in the Articles of Incorporation for the company. Here are some basic facts about authorized shares, and why this practice is so important to the health of the stock market.
Sometimes referred to as authorized stock, authorized shares may involve any class of stock that is legally issued by the company. All authorized shares must be issued within the guidelines that are provided for at the time the company is incorporated. Typically, it is recommended that a company include the potential for issuing stock that is far above the amount that will be issued initially. There is no regulation or procedure that makes it necessary for any company to ever issue the maximum number of authorized shares provided for in the incorporation papers. However, choosing a high number does allow the company to increase the amount of issued stock as the company grows, without having to obtain any further authorization to do so.
Ultimately, it is the stockholders of a company that have control of the number of authorized shares that may be issued by a company. Once the maximum figure that is quoted in the Articles of Incorporation has been reached, the company may appeal to the stockholders for the right to issue more shares. If the company can convince enough of the current shareholders that issuing additional stock is in the best interests of both parties, then the privilege of issuing an agreed upon amount of authorized shares will be granted. If the shareholders do not believe that issuing more authorized shares is a good move, then the company will not be able to proceed.
This check and balance system of authorized shares helps to prevent the stock market from being flooded by shares that are ultimately worthless. If a company does not have the resources to back up the value of the stock, each authorized share would plummet in value. By committing the company to a maximum issued amount of authorized shares, first in the incorporation papers and later through the existing shareholder, a proper balance is maintained and the best interests of both the corporation and the shareholders are served.