Financing and Listing Securities

Question 1

Explain the concept of share capital, including authorized shares, issued shares, and outstanding shares?

Answer 1

• Authorized shares are the maximum number of shares (either common or preferred) that a corporation may issue under the terms of its charter. A company may have more shares authorized than it has issued to shareholders. This withholding of authorized shares allows the corporation to raise additional funds in the future by issuing more shares. A corporation may also amend its charter to increase or decrease the number of authorized shares.
• Issued shares consist of the portion of authorized shares that the corporation has issued, either to the investing public, to company insiders, or to large institutional investors such as a mutual fund. Collectively, these shares owned by all shareholders are called outstanding shares. The capital stock section of the statement of changes in equity indicates the number of shares that a company currently has issued and that are outstanding (i.e., owned by shareholders).

Question 2

How does outstanding shares relate to market capitalization, provide an example?

Answer 2

• A company’s outstanding shares determine its market capitalization. Therefore, the total dollar value of the company is based on the current market price of its issued shares that are currently outstanding.
• Example 1 ABC Inc. has 10,000,000 shares authorized, and issued 6,000,000 shares to investors. The company recently bought back 150,000 shares, so its statement of changes in equity shows the following information: Common Shares − Authorized 10,000,000 shares of no par value − Issued 6,000,000 shares and 5,850,000 shares outstanding. Shares are currently trading at a price of $10 per share. Therefore, ABC Inc.’s market capitalization is $58,500,000 (calculated as 5,850,000 × 10).

Question 3

What is the public float and how does it provide insight into a stock’s volatility?

Answer 3

• Not all of a company’s outstanding shares are available for trading by the investing public. For example, shares held by insiders or by a mutual fund are generally held over the long term and therefore tied up. The public float refers to that portion of outstanding shares that are freely available for public trading. It excludes shares held by company officers and directors and by institutions with a controlling interest in the company. The public float can provide insight into a company’s stock. When fewer of a company’s shares are available in the market, any large buy or sell orders on the stock will have a more dramatic effect on its price. Conversely, a larger float means the stock price is likely to be more stable because it is less affected by large trades. Thus, the smaller the public float, the more volatile the stock price is likely to be.

Question 4

What are new issues compared to secondary market trades and IPOs?

Answer 4

• When a company raises equity capital in the marketplace, it issues securities from its own treasury. These issues are new securities, as compared to those being already publicly traded in what is known as the secondary market. New securities are issued from the company and then sold to the public. The proceeds are received by the company that issues the securities. If the company is issuing securities for the first time, it is considered an IPO, and a prospectus must first be filed with the regulators.
• Newly issued securities are often referred to as new issues. However, a new issue isn’t necessarily an IPO; it may be an additional raising of capital from a reporting issuer (an already public company). A prospectus is normally still required in such cases, unless a prospectus exemption is available. The prospectus of a reporting issuer may be less detailed than the one associated with an IPO because information about the reporting issuer is already available to the public.