In investing, shares authorized is defined as the total number of shares of stock that a publicly traded corporation can issue. The number of shares authorized is defined in the company’s charter. The charter may be referred to as the Articles of Association in the UK, India, and other countries, or as the Articles of Incorporation in the United States. The number of shares authorized can only be changed by a shareholder vote.
The number of actual shares of stock issued or outstanding at any time is usually significantly lower than the number of shares authorized. This gives management the flexibility to issue additional shares of stock in the company in order to raise additional capital. This capital can then be used to finance expansion or to acquire another company. It also allows a company to issue additional shares of stock to its executives or employees in lieu of other forms of compensation or as a reward for good performance.
Because most public companies want to maintain a comfortable number of shares authorized that have not been issued, it may buy back its own stock when it has excess cash on hand. When a company is going through an expansion or acquiring another company, it may issue additional shares of stock in order to finance the venture. Once the project begins to generate profits, the company may find itself in a position to buy back some shares of stock with the cash generated by the project. This action may restore the ratio of outstanding stock to authorized stock that the company had prior to the expansion or merger.
Another factor that may influence a company’s ability to issue shares of its authorized stock is public float. This term refers to the number of shares of a company’s stock that are owned by members of the public, as opposed to the number of shares that are owned by the company’s executives, directors, or management. A company with limited public float, that is, one whose shares are predominantly owned by company insiders, may not be as attractive to an outside investor as a company with greater public float. There are two reasons for this — An outside stockholder will have limited input into decisions if most of the stock is owned by management, and the stock may be perceived as unattractive by other investors, limiting its liquidity. For these reasons, a company wants to maintain a reasonable level of public float.