2. Stock Classifications

Let's talk about numbers of shares. When we're dealing with numbers of shares, we're dealing with four basic words. We've got authorized, issued, outstanding, and treasury stock. I think the best way to understand this stuff is to try to understand it visually. So when you start a company, you are authorized to sell a certain amount of shares. It may be a million, it may be 100 million, it may be a billion. Whatever is written in your incorporation documents, that's how many you are authorized to sell. So the biggest, broadest number is the amount of shares authorized. Then moving down, you may issue only a portion of what was authorized.

You may say, "Okay, I was authorized to sell, I don't know, a million shares. I have only issued 700,000 so far." You may at some point in the future want to issue the rest of these shares, and that's totally up to you because you are authorized to issue up to 1,000,000 shares. You just haven't done it yet, and there's nothing wrong with that. You may be saving that for a later stock offering. Then moving even further down into another smaller category, you have a certain number of shares that are outstanding.

Let's say that's 650,000. Outstanding shares are shares that are held by people outside of the company. They are outstanding. They're out in the wild. They're not held by us. There is, however, this other 50,000 in our example of shares that are not outstanding. So if outstanding means, let's just remember that as owned by outsiders, right? This is owned by people who are not the company. Then this little bit, this 50,000 here, this is what we call treasury stock.

And this would be, as you probably guessed, owned by insiders. And insiders really means the company. Owned by us. Outstanding shares are owned by outsiders. Treasury stock is owned by insiders, which is the company. So think of it this way. You were authorized to sell a million shares. You issued 700,000 of them. You sold 700,000. At some point, you decided, "You know what? I want some of those shares back. It's good for our company to own 50,000 of those shares." And so the company repurchased those shares. You can't un-issue them, but you can buy them back such that 650,000 of the 700,000 that you issued are still out there, whereas 50,000 are now with us inside the company walls.

And you can move this line any way you want. You could say we actually bought another 50, so now we have 100 and 600. But no matter what you do, the amount of outstanding plus the amount of treasury stock is going to add up to the amount of shares that were issued. Which is why I think this visualization is helpful. Authorized contains all of the shares that may ever be issued. Issued contains all of the ones that have been issued so far, where these have not been issued. Outstanding is the number that are still held by people outside of the company.

Treasury stock is owned by the company itself.