What are issued shares?

The issued shares consist of the company’s shares owned by investors, restricted shares as bonuses for company officials, and shares that the company itself holds.

Definition and Example of Issued Shares

Once a company is authorized to sell its shares, it retains the option to issue some or all of these shares for distribution. This can be done by selling them to the public; through restricted shares, grants, and stock options granted to company officials and employees; and by holding shares that the company retains or repurchasing them from investors.

For example, let’s assume that the board of XYZ Company authorizes the allocation of 10 million shares of common stock. The company then sells 2 million shares to the public, grants 2 million restricted shares to officials within the company, and retains 1 million shares in its treasury for later issuance as a secondary offering. The total issued shares amount to 5 million shares, even though the company has authorized 10 million shares. The remaining issued shares of 5 million are classified as unissued shares.

Note: Restricted shares and those sold to the public are classified as outstanding shares. When totaling outstanding shares to those held in treasury, it equals the total issued shares.

The number of issued shares does not account for stock options granted to employees. It also excludes shares that may be issued if convertible bonds or convertible preferred shares are exchanged for common stock.

How Do Issued Shares Work?

Issued shares can be distributed and retained in several different ways. A small private company may authorize and then issue one million shares to its owners, who already own 100% of the company. If the company authorizes one million shares but distributes only 500,000 shares to its owners, they still own 100% of the company, even though half of the authorized shares have not yet been distributed. However, if the company later sells the additional shares, grants them as stock options, or issues convertible preferred shares, those new shares will dilute the ownership of the company’s owners to less than 100%.

It becomes quite clear why it is important to distinguish between issued shares and other types of shares when calculating the value of the company and its stock. Issued shares include shares held by the company, which are not traded in the public market. For this reason, issued shares are not the same as outstanding shares, which are limited to restricted shares and shares available for sale in the market.

The most commonly used valuation for a publicly listed company is market capitalization, or “market value.” This is the number of outstanding shares multiplied by the current share price. For example, if a company has one million outstanding shares trading at $5 per share, it has a market capitalization of $5 million. Another figure relied upon by investors is earnings per share (EPS), which is often used to evaluate the stock price. So, if the company has one million outstanding shares and earned $100,000, the EPS would be 10 cents.

However, relying solely on the number of outstanding shares to estimate EPS or market capitalization can lead to overvaluation of the company’s or the stock’s value. This is because shares held by the company and shares that may be issued through granting preferred stock options and conversion to common stock are not counted as outstanding shares. Many investors prefer to use diluted market capitalization or diluted EPS. These figures calculate the number of issued shares plus estimates of the number of additional shares expected to be issued through the exercise of stock options, conversion of preferred shares, and other events. It is essential that the total number of outstanding shares does not include all issued shares held in the company’s treasury.

Note:

When a company repurchases shares for its treasury, the number of outstanding shares is reduced, thereby increasing the value of the remaining outstanding shares. Similarly, when the company sells some of its treasury shares to raise capital, the outstanding shares are diluted, which decreases their value.

The same thing occurs when insiders of the company exercise their stock options. The option shares are not considered outstanding until the option holder exercises the option and buys those shares from the company’s treasury, thereby reducing the previous outstanding shares.

Advantages and Disadvantages of Issued Shares

Advantages

• Distributed and held by the company, allowing it to control their quantity.
• They are a broader measure of the company’s value compared to outstanding shares.
• They help determine the diluted value.

Disadvantages

• They can cause confusion with authorized shares, which form a broader set.
• They do not include all shares that could enter the market, thus excluding potential dilution.
• Repurchased issued shares can increase the stock price.

Key Takeaways

• Issued shares include restricted shares, shares held in the company’s treasury, and shares held by investors (but not other shares that may enter the market later, such as shares granted as stock options).
• Issued shares are not the same as outstanding shares.
• The number of issued shares may not always reflect the total authorized shares that the company can issue.
• Including issued shares and other types of non-classified shares as outstanding shares provides a better picture of the stock’s diluted value.

Source: https://www.thebalancemoney.com/what-are-issued-shares-5209888