Shares have terms which an investor needs to understand in order to make wise decisions when trading in stocks. Apart from the common and the preferred shares, other shares exist and mostly are related . For one to understand the basics of investing you have to know the meanings and types of each share. The different types of shares available are as follows,
This refers to the overall amount of shares a company can offer as this reflects all the shares authorized at the time the company was being created. This is usually articulated in the articles of association as was set by the company at its commencement. This is subject to change with approval of majority shareholders. Authorized shares are also available in two types namely, issued and unissued shares. Issued shares are the shares the company avails to the public for sale.
These shares are retained and reserved in the treasury of the company. They are excluded in open shares nor are they available to the employees.
These are securities restricted specifically for reservation by the company for employees compensation and benefits. These shares cannot be transferable or traded unless certain specified conditions are complied with. Selling can only be done by permission granted by Securities and the Exchange commission. The restriction prevent employees from dealing with insider trading. These shares serve as employee incentive for compenastion.
When the securities Exchange Commission grants the permission to sell, a waiting period follows where the restricted stock becomes frozen in the period. The insider intending to sell must file his intention with the security exchange commission through a form declaring he wishes to sell his stock.
This refers to shares commonly availed to the open public or market. These are the kind of shares that buyers and sellers are allowed to trade in.
These are common shares authorized and issued to investors who have bought them. The stated shareholders get voting rights and part ownership of a company. Outstanding shares are inclusive of float plus restricted shares.
Shares and their interrelation
Examine how unissued and restricted shares are related to float where the company’s interest is concerned. Most companies will use restricted shares to retain a higher amount of authorized shares in the company’s treasury or management. This serves to protect shares and ensures that another company cannot use dubious means to take over a company’s stock. Controlling interest ensures no shareholder can have control on decisions by the company. In a small company with small shares, which attract traders such attraction might move the market to create an imbalance in demand and supply. This may in turn drive the stock higher compared to its total expected earnings. It is therefore important to read financial ratios regardless of whether outstanding or float shares are used.