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Definition: Authorized Stock
The articles of incorporation of a company define the maximum number of shares that a company is allowed to issue, referred to as authorized shares. It is represented under the equity section of the balance sheet.
A company might not issue all of the authorized stock it is allowed to issue to account for employee stock options and to act as a defense in case of a hostile takeover. For an investor, it is important because of the dilution that might occur when some part of authorized shares is issued which results in fall in earnings per share and voting power per share.
The authorized stock becomes outstanding after the shares are issued. When a company sells its authorized shares, such a shares become part of the issued capital. Such a capital may be used for financing the cash flow needs of the organization and is usually done when the company has passed the startup stage and is looking to enter into new markets or segments.
Once the company has issued stock, it has option of reacquiring shares and such a shares become part of its treasury shares. Authorized shares are a part of the company’s incorporation.