Stock Shares Aren't Equal

Not all shares of stock are equal. There are several different types of shares out there. When looking to invest, it is necessary that you have the complete picture in view. Before you can make an informed investment decision, you need to know the terms that define shares.

Authorized shares represent the total number of shares of stock that were authorized when the company was created. The number of shares can only be increased through a vote by the shareholders. Although the shares were authorized, that does not mean that they were all issued to the public.

Some companies will retain shares to use later. These are called treasury shares. You may see a company release treasury shares onto the market in order to bring in money for a project, expansion or research.

Restricted shares are company stock used for employee incentives and compensation plans. Restricted stockowners will need the permission of the SEC to sell their shares. After a company first goes public, there is a waiting period in which the insiders' restricted stock is frozen. No matter how established the company is, all insiders must file with the SEC before they sell their restricted stock.

Float shares are the number of shares that are actually available for trade on the open market. Anyone can purchase these shares. The outstanding shares are all of the shares issued by the company, including the restricted shares and the float shares.

For example, if company authorizes 100 shares. They hold 20 shares as treasury shares. There are 10 restricted shares of the company. The float is 70 (100-20-10= 70). The outstanding share amount is 80 (10+70=80).

When you look at the relationship of treasury shares and restricted shares to the float shares, you see where the controlling interest of the company resides. There are many companies that retain a large percentage of the authorized shares in treasury shares and in restricted shares.

By doing this, they are making sure that they can't be taken over by another company. They can also issue this stock in the future as a way to raise funds.

If the float of a company is quite small and yet the stock attracts many investors, it can often become volatile due to the imbalance between the supply and the demand. The stock will go up, become overpriced and then fall quickly in many cases.

By watching restricted shareholders, you can get a lot of information about a company. You can visit insider trading sites that let you know the planned or recent sales by insiders and major stockholders. You can often get a feel for the company through watching what they are doing.

By understanding the various types of shares, you will have a better insight to the company itself. All stocks aren't created equal. Make sure you know where the control lies in a company. It can tell you a lot about where a company is going. By understanding shares, you find that you are prepared to analyze companies.