Stock Share Types
Stock investing includes many terms with which every investor should become familiar in order to make educated decisions. Additionally, the different shares, such as authorized, treasury, outstanding and etc. have different characteristics. Thus it is important to become acquainted with the different types of shares so that you make successful investment choices.
Types of Shares
Some of the major types of shares include:
- Authorized Shares
When a company is created it is authorized to issue a total number of shares of stock, which is what is called authorized shares. The number is liable to changes under the agreement of the shareholders. Additionally, not all authorized shares have to be offered to the public and many companies decide to keep some of the shares for later uses.
- Treasury Shares
These are the shares that the company doesn't offer to the public or the employees. They are kept for other uses.
- Restricted Shares
This type of shares is used in different compensation plans. Additionally, companies use restricted shares as part of various incentive plans for their employees. In order to sell a restricted share, the holder should ask for the permission of the SEC.
- Float Shares
Float shares are the shares that are traded on the open market. These are actually the shares that investors trade with.
- Outstanding Shares
These shares include all the shares that a particular company has issued. These include float shares as well as restricted shares.
Share Types Relationships
As it can be seen from the definition of each share type, they are all closely linked to one another.
The first relationship that you should observe is the ratio of treasury shares and restricted shares to the number of float shares. Most companies prefer to hold a large percentage of their authorized shares in their treasuries or in the hands of their employees so that they can avoid the taking of control of an unfriendly competitor over the company. Additionally, companies may prefer to hold a larger percentage of their shares in order to have them at hand for future uses. Additionally, by holding a greater percentage of the company's stocks, the company ensures itself that it will have the voice over the decisions regarding important company issues.
Another aspect that should be observed regarding the shares issued by a company is the number of float shares that are offered to the public. If for instance the company has issued a small number of float shares, this may lead to imbalances. The latter will be caused by the smaller number of shares chased by a larger number of buyers. As a result the price of the stock may increase to unrealistic levels that don't cover the earnings of the company.
On the other hand, if the stock is no longer interesting to investors, the holders may find it difficult to unload it. As a result the price may fall rapidly.
Another important issue concerns the actions of restricted stockholders. It may be valuable to observe their actions through the many online resources that provide information on such issues. For instance, if restricted shareholders sell their stocks, it may be an indication that there is something wrong in the company.
Finally, many financial ratios use float shares, whereas others use outstanding shares in their calculations. You should be well aware of these differences since the results may vary a lot.
Final Piece of Advice
Gaining the profound knowledge regarding the various shares may give you the key to successful stock investing. So allocate the needed time to educate yourself on the topic.
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