Understanding Issued Shares: Definition, Types, and Significance in Corporate Finance

Issued shares are an essential concept in corporate finance. It refers to the number of shares that a company has issued to its shareholders, whether publicly or privately. Issued shares are the actual shares that a company has sold to its shareholders and are outstanding in the market. As an accredited university professor, this article provides a detailed understanding of issued shares, their types, and significance in corporate finance.

Types of Issued Shares

There are two types of issued shares; they are authorized shares and outstanding shares. Authorized shares refer to the maximum number of shares that a company is allowed to issue according to its articles of incorporation or charter. Outstanding shares, on the other hand, are the actual shares that the company has issued to its shareholders, which are currently held by them.

The number of authorized shares a company has does not necessarily reflect the number of outstanding shares it has. A company may have a higher number of authorized shares than the outstanding shares it has issued, giving it the flexibility to issue more shares in the future if needed. Alternatively, a company may have fewer authorized shares than the outstanding shares it has issued, making it more challenging to issue more shares in the future.

Significance of Issued Shares

The number of issued shares a company has is critical in determining its market capitalization, earnings per share, and other important financial ratios. The market capitalization of a company is the total value of its outstanding shares. The higher the number of outstanding shares, the higher the market capitalization of the company. The earnings per share of a company, which is the profit earned per share, is also influenced by the number of outstanding shares.

Issued shares are also important in determining the ownership and control of a company. The shareholders who own the issued shares have a right to vote and elect the board of directors, which makes critical decisions about the company's operations. The board of directors is responsible for appointing the company's management team and setting the company's strategic direction.

The number of issued shares can also influence the company's borrowing capacity. A company with a higher number of issued shares may be perceived to have a better financial position, and therefore, may be able to secure better loan terms and conditions.

Issued Shares and Dilution

One of the significant risks associated with issued shares is dilution. Dilution occurs when a company issues additional shares, which reduces the ownership percentage of existing shareholders. When new shares are issued, the earnings per share decrease, and the company's financial ratios may also be affected.

The dilution effect can be mitigated through the use of anti-dilution provisions in the company's articles of incorporation or through the issuance of convertible securities. Convertible securities, such as convertible bonds or convertible preferred shares, can be converted into common shares, which may limit the dilution effect on existing shareholders.

Conclusion

In conclusion, issued shares are an essential concept in corporate finance. It refers to the actual number of shares a company has sold to its shareholders and is outstanding in the market. The number of issued shares is critical in determining a company's market capitalization, earnings per share, ownership, and control, and borrowing capacity. However, the issuance of additional shares may also lead to dilution, which may reduce the ownership percentage of existing shareholders. Companies can mitigate the dilution effect through the use of anti-dilution provisions or convertible securities.