Definition of Authorized Shares
Authorized shares are basically the maximum shares of stock, which an entity can issue. The company specifies this particular number in its charter. However, this can be altered with approval from shareholder. Usually, the number of shares that are authorized is much more than what is actually required in order to provide a company the opportunity to issue stocks further when required.
Thus, if an entity is authorized to issue only 1000,000 shares, then the moment it issues the complete one lakh shares it can’t think of issuing shares any further unless the shareholder gives an approval.
The authorized shares definition should not be confused with terms such as outstanding and issued. Also, the number of outstanding and issued shares should not exceed the number of authorized shares. In case of a public company, the agent who is transferring the shares will ensure that the organization does not issue any extra share other than what the company has legal permission for. In case of a private company, the directors and the officers generally focus on issuing the common stock and they are held responsible if they issue more than the amount that has been authorized. If the company issues excessive number of common stocks then the shareholders suffer from more dilution, which ideally results in a drop in the stock prices.
Shareholders and investors who are looking to invest in an entity must find out the number of shares the entity is authorized for issuing. Ideally, a company organizes a meeting of shareholders to increase the share numbers that it is authorized for issuing. The moment the number increases, the directors establish terms& conditions regarding the manner in which they can acquire capital from the market. For example, the company can consider issuing a convertible debenture or simply sell its common stock at a price that is fixed. Companies increase the share numbers on a regular basis in order to acquire raise more capital in order to fulfill their goals and business plans. Companies sell equity to acquire more capital till they have gathered sufficient cash flow or assets to get finance from bank or debt from a private lending company.