The Essential Of Shares

While technical terms might sound overwhelming, they are often simple to understand – and very important.

 

- Simon Brown

What’s the difference between authorised and issued shares? What are share buybacks and treasury shares? It might sound like lots of jargon, but as is often the case, these are important terms that are simple to understand.

Let’s start right at the beginning. When a company is formed (whether private or listed) the founders will decide on an initial number of shares. These are the authorised shares, in other words those that have been authorised by the owners.

However, the owners may elect not to issue all the authorised shares, keeping some in reserve for later use. So, for example a new company starts life with 1 200 authorised shares but only issues 900 of them. These 900 shares are the ones that are tradable on the exchange and will be used to determine the market capitalisation of the business. (Market cap is calculated as follows: the number of issued shares x share price = value of company.)