Authorized shares are the maximum number of shares a company can issue. This number, which is established in the company’s articles of incorporation when the company is formed, can only be adjusted up or down by the vote of shareholders. Remember, as a shareholder you are a part owner of this company, and ownership comes with responsibilities. Typically, companies vote on whether to increase the number of outstanding shares they issue at their annual shareholder meeting. You will receive a notice of this meeting and should review it carefully to see what will be on the agenda. In many cases, the notice will allow you to send in your vote. You don’t have to actually attend the meeting, but if you do not express your opinion, the company will vote for you “by proxy” and will usually assume that your vote is in line with their intentions.
Authorized shares are broken down into three basic categories: treasury stock, restricted shares, and outstanding shares. Here's a brief breakdown of these categories:
Treasury stock: Stock that is held by the company itself
Restricted shares: Registered shares of stock that are issued to executives and directors of a company, as well as other affiliates. These shares are typically regarded as a form of employee compensation and are available to the recipient after a designated “vested” period. Recipients of restricted shares cannot transfer their stock and can only trade the shares in compliance with special Securities and Exchange Commission (SEC) regulations.
Outstanding shares: The number of authorized shares that are available to be bought and sold by the public. This number includes restricted shares but does not include treasury stock.
To illustrate this, let’s say a company authorizes 1,000 shares of stock to be issued. However, they designated 300 shares as treasury stock and 100 shares as restricted shares. The number of outstanding shares would be:
1,000 shares – 300 shares (treasury stock) = 700 outstanding shares