Shares Issued are the shares allotted by the company to the shareholders including public, insiders or institutional investors and held by them and are shown under the owner’s equity in the liability side of the balance sheet of the company.
Shares Issued Definition
Issued Shares are that portion of the total authorized shares of the company that are held by any type of shareholders including management, public, or any other type of investor. For example, McDonald’s Authorized Shares in 2018 were 3.5 billion, out of which its total shares issued are 1.66 million shares and 0.89 are the treasury shares.
Total Unissued Shares = Total Authorized Shares – Shares Issued – Treasury Shares = 3.5 – 1.66 – 0.89 = 0.95 million
By issuing shares firms can raise capital at low cost and invite investors to be a part of their growth story. These are mainly long term strategic initiatives and require in-depth analysis.
Types of Shares Issued by a Company
#1 – Ordinary Shares
These are the most common type of shares that are issued by a public listed firm and hence the name common stock. They provide the simplest way for a firm to raise capital as they do not provide any special rights. The only right with common stockholders is the right to vote. They don’t have any share on profit and dividend payment is subject to the decision of the board or management.
#2 – Preference Shares
Preference shares are shares where the shareholder has a right to receive the dividend before it can be paid out to common stockholders. Often, they have a fixed dividend payout at fixed intervals of time even though the firm might not declare a dividend for the ordinary shareholder. Additionally, they can be paid out an additional dividend based on some predetermined conditions. Also, in case of bankruptcy, they are preferred over common stockholders in terms of repayment. However, preferred shareholders do not get any voting rights. These are mainly popular among investors who want to invest in equity but also want a steady fixed income.
Preference Shares can be further categorized into: –
- Cumulative preferred shares: These shareholders are entitled to dividends including those that were not paid out in the past before any dividend can be paid out to ordinary or common stockholders. Simply stating, their dividends keep cumulating and can be claimed in the future.
- Non-cumulative preferred shares: Holders of non-cumulative preferred shares do not enjoy any such privilege. If the firm does not declare any dividend they have no power to claim it in the future.
- Convertible preferred stock: Investors of this stock type have the right that allows them to convert their preferred shares into common stock based on some predetermined conditions and after a pre-decided date.
#3 – Redeemable Shares
These are the shares, as the name suggests, that can be redeemed by the firm based on certain pre-defined conditions like after a particular duration. They are more like an option as the firm may or may not redeem these shares and the shareholders are aware of such a clause beforehand. These shares are normally given to employees so that once the employee resigns, these can be bought back most often at the issue price.
#4 – Non-Voting Shares
These are like ordinary shares except the fact that there are non-voting rights. These are again used by firms to reward their employees and are paid out as a part of their compensation. The advantage they provide are the tax benefits, employee retention without diluting the voting authority.
#5 – Management Shares
These are the class of shares that are used by management to retain control of the company. They carry extra voting rights that are usually done by converting multiple votes into a single share. They are very effective in preventing hostile takeovers and other unfavorable circumstances.
- Issued shares help firms to raise capital without any debt or fixed rate of interest. The firms are not obliged to pay any interest and can use the raised capital to grow the business.
- Not only it raises capital for the firms, but there is also no obligation on the part of management to share profits. Firms may or may not, at their discretion, can share the profits in the form of a dividend to the stockholders. There are some types of issued shares where the dividend has to be paid out but, in those cases too, the management has no liability to share profits and the firm can do away by paying only the pre-decided dividend amount.
- These shares provide a very flexible mechanism of raising money as management can decide on how much shares and when to issue. Additionally, it also provides the firm to redeem these shares based on the category they are issued whenever the management considers it favorable.
- Unlike debt where a fixed rate of interest is promised, issued shares are affected a lot by the economic cycle. Both economic expansions and economic recession cycles have to exaggerate effects which affect the leverage of the company.
- The issues shared can be disadvantageous for a growing business where the returns are more than the prevailing rate of interest. In such case management ends up paying more money than what would have been raised through bank loans thus impacting the opportunity cost.
- Raising capital without any fixed rate of interest has an implicit cost attached to it. This is because for every type of issued shares there are certain conditions that are pre-decided. For example, for common stockholders, ownership has to be diluted, for preferred shareholder a fixed rate of the dividend has to be decided and redeemable shares can only be redeemed after a particular duration.
- The process of issuing shares has a lasting impact on the firm’s strategy for the long term and hence requires a well-managed investment firm to handle and execute this process.
- Since shares dilute ownership (especially in case of common stockholders) this might become a case of a hostile takeover.
- Raising more money becomes challenging as issuing more shares decreases the EPS which is not taken well by the existing shareholders.
- The issues shared have an implicit cost. They might provide a mechanism to raise capital at a low cost, but they come with a price as firms might have to relinquish voting rights or predefined minimum dividend.
- There are many tax and regulatory implications involved in issuing shares.
Shared Issues are an important weapon for a firm to attract investments for its growing business. However, each type has its own perks and limitations. The management should be wary of all implicit costs and hence carry out the process with proper planning else it may lead to a long legal and regulatory battle.
This has been a guide to what is Shares Issued and its definition? Here we discuss the types of Shares Issued along with examples, advantages, disadvantages, and limitations. You can learn more about finance from the following articles –