Every company starts with the ownership in the hands of one or a few owners who privately hold 100% of the company shares. However, sooner or later, such private companies launch an Initial Public Offering to offer their shares for the first time or a right issue if they are a public company but want to raise more funds.
Although the issue of shares is common, it calls for understanding the basic concept of issuing shares. This article will help you understand what are issued shares and how they help in analysing a company financially.
Issued shares meaning
Issued shares are the total number of shares that a company issues as part of its authorised shares. They include all the shares held by retail or anchor investors, financial institutions, and insiders of the company, such as executives or employees.
The main aim of issued shares is to raise funds by their sale and use the funds for company purposes. Hence, issued shares depict the total amount of funds a company has generated from various shareholders and play a key role in determining a company’s market capitalisation. Types of shares within issued shares include both common and preference shares.
Read more: What are shares
Understanding issued shares
Most companies start from scratch and with the personal capital of the owner. However, as the company expands, it needs more capital, which makes it difficult for the owner to invest privately. Even if a company owner may find private investors, they all wait for the company to go public by issuing the shares to big investors and the general public.
When a company offers shares to the general public to raise funds, all the buyers become shareholders. In addition to the general public, the company may also issue shares to big financial institutions, investors, and company employees as part of their compensation packages.
The shares sold or held by all these entities are called issued shares, meaning that they are shares issued by a company. The shareholders have all the right to sell these shares at any time or buy them again.
Read more: Bonus shares
Issued shares and ownership
A private company sells its shares to investors to raise funds and take the company public. Once the company becomes a public limited company and has its shares listed on the stock exchanges for trading, the ownership lies in the hands of the shareholders who hold the issued shares.
Here, every shareholder is counted for the ownership of the company. It can include financial institutions holding blocks of shares, retail investors buying the shares from the stock exchanges, and insiders such as company executives and employees. Most insiders may not be current shareholders but may have the future right to stock entitlement. However, they are still considered shareholders with company ownership.
Issued shares vs outstanding shares
Now that you know what are issued shares, let us move on to understand the difference between issued and outstanding shares.
Issued shares are the total number of shares the company has issued or sold since its incorporation. It is the number of shares investors and insiders such as company promoters, executives, or employees hold.
On the other hand, outstanding shares are issued shares minus treasury shares. Treasury shares are those held by a company in its treasury after buying them back from the market. Treasury shares are not considered outstanding shares, as the company may retire them, excluding them from being available to the investors.
What is the difference between authorised shares and issued shares?
Authorised shares are the maximum number of shares a company can issue. The number differs from company to company, and a company’s articles of incorporation specify the number of authorised shares. A company’s founders or board of directors approve the number of authorised stocks in their corporate filing paperwork.
Issued shares are shares a company has issued from the maximum number of stocks it can issue. As a company must adhere to authorised stock count, issued shares can not be higher than the authorised stocks.
Why do companies issue shares?
One of the main reasons for a company to issue shares is to raise money for company purposes. When it sells shares, the buyers pay a certain amount during its IPO, which the company can use for various business purposes, such as expansion and debt repayment. It can also issue shares through an IPO to provide an exit to private investors. If it needs more funds afterwards, it may launch a rights issue to issue more shares.
What is the disadvantage of issuing shares?
The main disadvantage of issuing shares is the decrease in ownership of the company. If you are the sole owner of a private company, you hold 100% shares and can make business decisions as you deem fit. However, when a company issues shares, the ownership decreases as investors who buy the shares become owners, equaling the number of shares held by an individual shareholder.
Furthermore, a rights issue can negatively impact a company’s goodwill, as investors may think it is not creating adequate revenue and have to raise further funds.
The bottom line
Issued shares are the number of shares issued by a company since its inception, and they are always within the number of authorised shares. Companies issue shares to raise money for business purposes or provide an exit to private investors. However, issuing shares decreases the ownership of the original owners and makes the new shareholders part-owners of the company. Now that you know what are issued shares, you can analyse a company better and invest accordingly.
