Not all shares of stock are the same. Authorized, restricted, float, outstanding, and unissued shares differ in key ways. You will hear these terms and see some of them used in financial ratios, so it is vital to understand how these types of shares differ.
The 5 Types of Stock Shares
Before you embark on buying these types of stocks, it's vital that you know what these terms mean:
Authorized shares: These shares represent the total number of shares of stock authorized when the company was created. Only a vote by the shareholders can increase this number of shares.
Still, just because a company authorized a certain number of shares doesn't mean it must issue all of them to the public. Most companies retain shares for use later called unissued stock or shares.
Unissued Shares: Shares a company retains in its treasury that are not issued to the public or to employees are unissued shares.
Restricted Shares: These shares of company stock are used for employee incentive and compensation plans. Owners of this stock need the permission of the SEC to sell. There is a waiting period after a company first goes public where this type of stock is frozen. When insiders want to sell their stock, they must file a form with the SEC stating their intent. Even insiders of established companies must file with the SEC before selling their restricted stock.
Float Shares: Float refers to the number of shares available for trade on the open market. Most people can buy these shares.
Outstanding Shares: These shares include all the shares issued by the company, which would be the restricted shares plus the float.
Here's a simple example with numbers to show how these shares are related:
- Authorized Shares – 100
- Unissued Shares – 20
- Restricted Shares – 10
- Float – 70 (100 – 20 – 10 = 70)
- Outstanding Shares – 80 (10 + 70 = 80)
Why Is This Important?
There are a few things you can look at to determine how all of these share types stack up in relation to each other.
Who Stays in Charge?
Look at how unissued and restricted shares compare against float to see where the controlling interest of the company will reside. Many companies retain a large percentage of the authorized shares in their treasuries or in the hands of management through restricted shares. They do this to make sure no other company can seize control in an unfriendly takeover.
They may also want to have stock handy for future issue instead of using debt to buy another company or for another major purchase. Controlling interest held in unissued stock means outside shareholders will have little influence over the decisions of the company.
How Much Float Is There?
If the float is very small and the stock attracts the notice of investors, it can become volatile because of supply and demand imbalances. More buyers will drive the price up, which is not a bad thing if you own the stock. Still, it may make the stock overpriced when compared to earnings or other basic measures.
Also, if the stock falls out of favor, sellers may have trouble selling their shares, which would tend to force the price down further and faster.
What Are Restricted Owners Doing?
You can find this out from many online sources. MSN Money has an insider trading search function. Just enter a stock symbol, and it will return the most recent sales or planned sales by insiders or major shareholders.
Most of the time, these sales signal nothing of interest to investors. When a large number of insiders file plans to sell major blocks of stock, it could signal trouble.
How Are Ratios Being Calculated?
Notice when reading financial ratios whether they are using float or outstanding shares in the calculation. It can make a big difference in the outcome.
A Final Word
Knowing the terms used to describe various shares will help you get a better handle on analyzing companies and deciding if you want to buy shares in them.