Shares Issued Definition Examples Top 5 Types Of Issued Shares

Shares Issued Definition

Issued Shares are that portion of the total authorized shares of the company that are held by any type of shareholdersType Of ShareholdersThe common shareholders and preferred stakeholders are the two types of shareholders.read more, 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 and 0.89 are the treasury sharesTreasury SharesTreasury Stock is a stock repurchased by the issuance Company from its current shareholders that remains non-retired. Moreover, it is not considered while calculating the Company’s Earnings Per Share or dividends. read more.

Total Unissued Shares = Total Authorized Shares – Shares Issued – Treasury Shares = 3.5 – 1.66 – 0.89 = 0.95 million

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Types of Shares Issued by a Company

#1 – Ordinary Shares

These are the most common types of shares issued by a publicly listed firm, hence the name common stock. They provide the simplest way for a firm to raise capital as they do not give 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 sharesPreference SharesA preferred share is a share that enjoys priority in receiving dividends compared to common stock. The dividend rate can be fixed or floating depending upon the terms of the issue. Also, preferred stockholders generally do not enjoy voting rights. However, their claims are discharged before the shares of common stockholders at the time of liquidation.read more are shares where the shareholder has a right to receive the dividend before it can be paid to common stockholders. They often have a fixed dividend payout at fixed intervals, 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 incomeFixed IncomeFixed Income refers to those investments that pay fixed interests and dividends to the investors until maturity. Government and corporate bonds are examples of fixed income investments.read more.

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 sharesNon-cumulative Preferred SharesNon-cumulative preference shares are the stocks which allow the investors to receive a fixed dividend at the pre-determined dividend rate every year. However, if any year’s dividend remains unpaid, the preference shareholders are not liable to receive it in the future.read more do not enjoy any such privilege. If the firm does not declare any dividendDeclare Any DividendDividend declared is that portion of profits earned that the company’s board of directors decides to pay off as dividends to the shareholders of such company in return to the investment done by the shareholders through the purchase of the company’s securities.read more, 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 predefined 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 generally 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 sharesOrdinary SharesOrdinary Shares are the shares that are issued by the company for the purpose of raising the funds from the public and the private sources for its working. Such shares carry voting rights and are shown under owner’s equity in the liability side of the balance sheet of the company.read more 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 advantages they provide are the tax benefitsTax BenefitsTax benefits refer to the credit that a business receives on its tax liability for complying with a norm proposed by the government. The advantage is either credited back to the company after paying its regular taxation amount or deducted when paying the tax liability in the first place.read more, employee retention without diluting the voting authority.

#5 – Management Shares

These are the class of sharesClass Of SharesShare class is the company’s bifurcation of its shares into different classes on the basis of their voting rights, privileges, ownership restrictions. For example dividing the common stock into class A shares having the most privileged voting rights and class B shares which have less voting rights.read more 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 takeoversHostile TakeoversA hostile takeover is a process where a company acquires another company against the will of its management.read more and other unfavorable circumstances.

Advantages

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 does 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 stockholdersStockholdersA stockholder is a person, company, or institution who owns one or more shares of a company. They are the company’s owners, but their liability is limited to the value of their shares.read more. There are some types of issued shares where the dividendDividendDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more has to be paid out. However, in those cases too, the management has no liability for sharing 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.

Disadvantages

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 cyclesEconomic Recession CyclesEconomic recession is defined as the phase in which economic activities of a country become stagnant, leading to a disturbance in the business cycle and affecting the overall demand-supply balance. read more 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 a case, management ends up paying more money than what would have been raised through bank loans, thus impacting the opportunity costOpportunity CostThe difference between the chosen plan of action and the next best plan is known as the opportunity cost. It’s essentially the cost of the next best alternative that has been forgiven.read more.Raising capital without any fixed rate of interest has an implicit costImplicit CostImplicit cost is the opportunity cost of the organization’s resources where the organization calculates what the business would have earned if the resource had been employed for some other purpose instead of the business activity.read more attached to it. It is because, for every type of issued shares, certain conditions are pre-decided. For example, for common stockholders, ownership has to be diluted. For preferred shareholders, a fixed rate of the dividend has to be decided, and redeemable shares can only be redeemed after a particular duration.

Limitations

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 EPSEPSEarnings Per Share (EPS) is a key financial metric that investors use to assess a company’s performance and profitability before investing. It is calculated by dividing total earnings or total net income by the total number of outstanding shares. The higher the earnings per share (EPS), the more profitable the company is.read more, which is not taken well by the existing shareholders.

Important Points

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 dividends.There are many tax and regulatory implications involved in issuing shares.

Conclusion

Shared Issues are an essential weapon for a firm to attract investments for its growing business. However, each type has its 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 lengthy legal and regulatory battle.