| The authorized shares of a company refer to the | | | | more shares. Again, using the above example: Let's |
| maximum number of shares a company can issue to | | | | say an investor in XYZ Company holds 20% of the |
| the market. This number is part of a company's | | | | float, which in this case would be 5,000,000 shares. |
| corporate charter. A company can change this | | | | His ownership stake would be cut in half if XYZ |
| number with shareholder approval. When a company | | | | Company issues another 25,000,000 shares. |
| becomes public, the company indicates how many | | | | How do you avoid this situation? First, contact the |
| shares it is authorized to issue. The shares issued | | | | company's management. Ask what management's |
| when it went public are subtracted from the | | | | intentions are with respect to issuing more shares. |
| authorized shares. The remaining number is the | | | | You would want to know if they plan on issuing |
| additional amount of shares that the company can | | | | more shares to the public and when. If the company |
| issue or sell to the market. | | | | informs you they are planning on issuing more shares |
| Let's take an example: XYZ Company has 50,000,000 | | | | in the near future, you may want to be cautious |
| authorized shares designated from its corporate | | | | unless you felt the new issuing of shares would |
| charter. Out of the authorized shares, 25,000,000 are | | | | cause the stock to rise. For example, if XYZ was to |
| shares outstanding. XYZ Company can issue another | | | | make an acquisition of another company that would |
| 25,000,000 shares to the market if they see a need | | | | add on more earnings, it might be worth having your |
| to. Companies usually do this if the need to raise | | | | position diluted. The value of the rising stock could |
| funds for operations, marketing or strategic | | | | offset the loss due to dilution. A good rule of thumb |
| developments. | | | | to minimize risk of share dilution is to invest in the |
| An investor should be concerned with the size of the | | | | best penny stock companies that have most of their |
| authorized shares. If the authorized shares are 10 | | | | shares issued, so you know exactly how many |
| times the size of the outstanding shares, the investor | | | | shares to expect in the market. |
| could find his position diluted if the company issues | | | | |