Issued shares is just one term used to designate the status of specific shares of company stock. Besides issued shares, there are outstanding shares, treasury shares, basic shares, and diluted shares. These designations are used in different approaches to assessing the value of a company and its stock.
Definition and Example of Issued Shares
Once a company authorizes the sale of shares of its stock, it has the option to issue some or all of those shares to be distributed. This can be done by sale to the public; through restricted stock, grants, and options awarded to company insiders and employees; and by retaining treasury shares, which are held by the company or repurchased from investors. For example, let’s say XYZ Company’s board authorizes 10 million shares of common stock. The company then sells 2 million shares to the public, awards 2 million restricted shares to company insiders, and retains 1 million shares in its treasury to issue later as a secondary offering. The total of issued shares stands at 5 million, even though the company has authorized 10 million shares. The 5 million remaining authorized shares are categorized as unissued shares. The number of issued shares doesn’t include stock options granted to employees. It also excludes shares that could 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 held in several different ways. A small, private company might authorize and then issue 1 million shares to its owners who then own 100% of the company. If the company authorizes 1 million shares but distributes 500,000 to its owners, they still own 100% of the company, even though half of the authorized shares remain unissued. However, if the company later sells the additional shares, grants them as stock options, or issues convertible preferred shares, those new shares would dilute the owners’ equity to less than 100%. A big reason to differentiate between issued shares and other types of shares becomes apparent when calculating what a company and its stock are worth. Issued shares include the company’s treasury shares, which aren’t traded on the public market. That’s why issued shares aren’t the same as outstanding shares, which are limited to shares of restricted stock and shares available for sale on the market. The most commonly used valuation for a publicly traded company is market capitalization, or “market cap.” This is the number of outstanding shares multiplied by the current share price. For instance, a company with 1 million outstanding shares trading at $5 each would have a market capitalization of $5 million. Another number that investors rely on is earnings per share (EPS), which is often used to value share price. So if a company with 1 million outstanding shares earned $100,000, the EPS would be 10 cents. But basing EPS or market-cap estimates just on the number of shares outstanding has the potential to overvalue the company or its stock. That’s because shares held by the company and shares that could be issued through grants preferred stock conversions—and exercised stock options aren’t counted as outstanding shares. Many investors prefer to use diluted market cap or diluted EPS. These figures count the number of issued shares combined with estimates of how many additional shares are expected to be issued through exercised options, preferred stock conversions, and other events. Importantly, the total number of outstanding shares doesn’t include all the issued shares held in the company’s treasury stock. The same thing happens when company insiders exercise their stock options. Option shares aren’t considered outstanding until the holder exercises the option and buys those shares out of the company’s treasury shares, which dilutes earlier outstanding shares.
Pros and Cons of Issued Shares
Pros Explained
Distributed and held by the company, which can control their quantity: By authorizing and deciding whether to distribute or hold on to issued shares, this valuation metric can be managed by companies.Broader measure of company value than outstanding shares: Because issued shares include shares being held as treasury stock by the company, they indicate more about value than outstanding shares alone.Help indicate diluted value: This includes all issued shares with other shares that haven’t come to market, which can indicate to investors a value that reflects potential dilution.
Cons Explained
Can be confused with authorized shares, which are a broader set: A company can have additional unissued shares that have been authorized and could come to market in any new offerings, or all authorized shares may have been issued.Don’t include all shares that could come on the market, so they exclude potential dilution: Shares that could be distributed if options are exercised, or through convertible shares or bonds, aren’t counted, so issued shares may fail to indicate chances of dilution later.Repurchased issued shares can inflate a stock’s share price: Issued shares repurchased by the company are held as treasury shares, which lower the number of publicly traded shares and push up the stock’s price even when the value of the company remains unchanged.
