Chic,
Authorized shares are part of the agreement between a company and it's share holders. When a company IPOs, they issue a certain amount of share in the company for a particular price. The shareholders buying the stock have a general idea of stock volatility and momentum based on the share price and how many shares there are. Some investors only like to buy/sell/hold shares in certain price ranges, for example, many people don't like getting into stocks that have single digit stock prices and others don't like getting into stocks that have triple digit share prices.
Say the company IPO's 50 million shares at $10 a share with an authorization of 250 million shares. The company can use the 200 million shares that aren't yet issued to acquire other companies, to issue to employees in employee stock purchase plans or in incentive stock option plans, or for stock splits. Thus, the company would have shareholder approval for issuing those non-issued shares which is called share dilution as the Earnings Per Share is effected by their being issued. The shareholders are voting, with their investment, that the company will wisely use those "authorized" shares. If the example company above acquires another company for $50 million in stock, and the stock is still at $10 share price, that's 5 million shares, so the new outstanding shares for the company would be 55 million of it's 250 million authorized shares. They would have to dilute their earnings over more shares and a stock holder's investment is effected positively or negatively based on if the purchase of the second company adds earnings or causes losses. Since the company now has 55 million shares issued, they wouldn't be able to issue a 5 for 1 stock split as that would require them to be authorized by the share holders for 275 million shares. The company could do a 2 for 1, 3 for 1, or 4 for 1 though, or maybe two 2 for 1 splits without having to ask the share holders (owners) for authorization, since they had already given that authorization when they bought the stock.
As a shareholder, you give the company purchasing power of authorized shares (similar to a credit line) to buy other companies or reward it's employees or attract new employees.
-John |
