Why can unissued capital stock exist?
Unissued capital stock allows a company to issue shares at any given time, diluting the ownership of current shareholders. This does not seem logical nor fair. At any given time, shouldn't 100% of the company be owned by the shareholders? Because by nature of unissued capital stock, not 100% of a company is owned at a given time (unless all unissued capital stock are issued).
stocks financial-literacy stock-valuation
edited Jan 1 at 5:22
Dheer
50.2k962149
asked Jan 1 at 3:30
Novel VenturesNovel Ventures
1813
add a comment |
Unissued capital stock allows a company to issue shares at any given time, diluting the ownership of current shareholders. This does not seem logical nor fair. At any given time, shouldn't 100% of the company be owned by the shareholders? Because by nature of unissued capital stock, not 100% of a company is owned at a given time (unless all unissued capital stock are issued).
stocks financial-literacy stock-valuation
edited Jan 1 at 5:22
Dheer
50.2k962149
asked Jan 1 at 3:30
Novel VenturesNovel Ventures
1813
add a comment |
Unissued capital stock allows a company to issue shares at any given time, diluting the ownership of current shareholders. This does not seem logical nor fair. At any given time, shouldn't 100% of the company be owned by the shareholders? Because by nature of unissued capital stock, not 100% of a company is owned at a given time (unless all unissued capital stock are issued).
stocks financial-literacy stock-valuation
edited Jan 1 at 5:22
Dheer
50.2k962149
asked Jan 1 at 3:30
Novel VenturesNovel Ventures
1813
Unissued capital stock allows a company to issue shares at any given time, diluting the ownership of current shareholders. This does not seem logical nor fair. At any given time, shouldn't 100% of the company be owned by the shareholders? Because by nature of unissued capital stock, not 100% of a company is owned at a given time (unless all unissued capital stock are issued).
stocks financial-literacy stock-valuation
stocks financial-literacy stock-valuation
edited Jan 1 at 5:22
Dheer
50.2k962149
asked Jan 1 at 3:30
Novel VenturesNovel Ventures
1813
edited Jan 1 at 5:22
Dheer
50.2k962149
asked Jan 1 at 3:30
Novel VenturesNovel Ventures
1813
edited Jan 1 at 5:22
Dheer
50.2k962149
edited Jan 1 at 5:22
Dheer
50.2k962149
edited Jan 1 at 5:22
Dheer
50.2k962149
50.2k962149
asked Jan 1 at 3:30
Novel VenturesNovel Ventures
1813
asked Jan 1 at 3:30
Novel VenturesNovel Ventures
1813
asked Jan 1 at 3:30
Novel VenturesNovel Ventures
1813
1813
add a comment |
add a comment |
1 Answer
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It's not really true to say that having unissued stock means that the company is not 100% owned. It'd be more accurate to say that the unissued shares are assets of the company (and therefore, indirectly, of the current shareholders). The company can issue the stock to others in exchange for something that increases the value of the company by a comparable amount (e.g. cash or work). This makes it a fair trade which should not decrease the value of existing shareholders' stock.
For example, suppose company X has 10 issued shares of stock and a total of 20 authorized shares, (leaving 10 unissued). The valuation of the company is $10, meaning each owned share is worth $1. Now someone comes and gives the company $1 for a new share of stock. Now the company has an extra dollar it didn't have before so it's now worth $11. There are also now 11 issued shares of stock, so each one is still worth a dollar. The original shareholders have been "diluted" in that they now own a smaller percentage of the company, but due to the increase in the company's value, they're just as well-off as they were before. Company X can do this 9 more times before it's out of authorized shares and needs to ask the shareholders for permission to increase the number.
answered Jan 1 at 3:57
DanielDaniel
1,056517
2
It's worth pointing out that while the value of the stock doesn't go down, the voting power that shareholders will have has gone down... it's hard to say what's better out of owning 1/10 of a $10 company and owning 1/11 of an $11 company, but I can see people being potentially upset about it.
– Ben Millwood
Jan 1 at 12:42
1
@Ben for sure. That's part of why the shareholders have to authorize more stock. Also, presumably shareholders own the company because they think it will eventually be worth more than it is today per share. If that's the case, diluting their percentage of ownership also dilutes their share of the value of the company's growth.
– Daniel
Jan 1 at 12:48
Hmm. Sort of. If you think the company will grow by $X then yes, your share of that has been diluted. If you think the company will grow by Y% then the stock issuance doesn't affect that. So it depends what you think the bottleneck on growth will be.
– Ben Millwood
Jan 1 at 12:52
@BenMillwood Presumably, the company would only do that if it could do something useful with the $1 it got.
– David Schwartz
Jan 3 at 7:04
add a comment |
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1 Answer
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It's not really true to say that having unissued stock means that the company is not 100% owned. It'd be more accurate to say that the unissued shares are assets of the company (and therefore, indirectly, of the current shareholders). The company can issue the stock to others in exchange for something that increases the value of the company by a comparable amount (e.g. cash or work). This makes it a fair trade which should not decrease the value of existing shareholders' stock.
For example, suppose company X has 10 issued shares of stock and a total of 20 authorized shares, (leaving 10 unissued). The valuation of the company is $10, meaning each owned share is worth $1. Now someone comes and gives the company $1 for a new share of stock. Now the company has an extra dollar it didn't have before so it's now worth $11. There are also now 11 issued shares of stock, so each one is still worth a dollar. The original shareholders have been "diluted" in that they now own a smaller percentage of the company, but due to the increase in the company's value, they're just as well-off as they were before. Company X can do this 9 more times before it's out of authorized shares and needs to ask the shareholders for permission to increase the number.
answered Jan 1 at 3:57
DanielDaniel
1,056517
2
It's worth pointing out that while the value of the stock doesn't go down, the voting power that shareholders will have has gone down... it's hard to say what's better out of owning 1/10 of a $10 company and owning 1/11 of an $11 company, but I can see people being potentially upset about it.
– Ben Millwood
Jan 1 at 12:42
1
@Ben for sure. That's part of why the shareholders have to authorize more stock. Also, presumably shareholders own the company because they think it will eventually be worth more than it is today per share. If that's the case, diluting their percentage of ownership also dilutes their share of the value of the company's growth.
– Daniel
Jan 1 at 12:48
Hmm. Sort of. If you think the company will grow by $X then yes, your share of that has been diluted. If you think the company will grow by Y% then the stock issuance doesn't affect that. So it depends what you think the bottleneck on growth will be.
– Ben Millwood
Jan 1 at 12:52
@BenMillwood Presumably, the company would only do that if it could do something useful with the $1 it got.
– David Schwartz
Jan 3 at 7:04
add a comment |
It's not really true to say that having unissued stock means that the company is not 100% owned. It'd be more accurate to say that the unissued shares are assets of the company (and therefore, indirectly, of the current shareholders). The company can issue the stock to others in exchange for something that increases the value of the company by a comparable amount (e.g. cash or work). This makes it a fair trade which should not decrease the value of existing shareholders' stock.
For example, suppose company X has 10 issued shares of stock and a total of 20 authorized shares, (leaving 10 unissued). The valuation of the company is $10, meaning each owned share is worth $1. Now someone comes and gives the company $1 for a new share of stock. Now the company has an extra dollar it didn't have before so it's now worth $11. There are also now 11 issued shares of stock, so each one is still worth a dollar. The original shareholders have been "diluted" in that they now own a smaller percentage of the company, but due to the increase in the company's value, they're just as well-off as they were before. Company X can do this 9 more times before it's out of authorized shares and needs to ask the shareholders for permission to increase the number.
answered Jan 1 at 3:57
DanielDaniel
1,056517
2
It's worth pointing out that while the value of the stock doesn't go down, the voting power that shareholders will have has gone down... it's hard to say what's better out of owning 1/10 of a $10 company and owning 1/11 of an $11 company, but I can see people being potentially upset about it.
– Ben Millwood
Jan 1 at 12:42
1
@Ben for sure. That's part of why the shareholders have to authorize more stock. Also, presumably shareholders own the company because they think it will eventually be worth more than it is today per share. If that's the case, diluting their percentage of ownership also dilutes their share of the value of the company's growth.
– Daniel
Jan 1 at 12:48
Hmm. Sort of. If you think the company will grow by $X then yes, your share of that has been diluted. If you think the company will grow by Y% then the stock issuance doesn't affect that. So it depends what you think the bottleneck on growth will be.
– Ben Millwood
Jan 1 at 12:52
@BenMillwood Presumably, the company would only do that if it could do something useful with the $1 it got.
– David Schwartz
Jan 3 at 7:04
add a comment |
It's not really true to say that having unissued stock means that the company is not 100% owned. It'd be more accurate to say that the unissued shares are assets of the company (and therefore, indirectly, of the current shareholders). The company can issue the stock to others in exchange for something that increases the value of the company by a comparable amount (e.g. cash or work). This makes it a fair trade which should not decrease the value of existing shareholders' stock.
For example, suppose company X has 10 issued shares of stock and a total of 20 authorized shares, (leaving 10 unissued). The valuation of the company is $10, meaning each owned share is worth $1. Now someone comes and gives the company $1 for a new share of stock. Now the company has an extra dollar it didn't have before so it's now worth $11. There are also now 11 issued shares of stock, so each one is still worth a dollar. The original shareholders have been "diluted" in that they now own a smaller percentage of the company, but due to the increase in the company's value, they're just as well-off as they were before. Company X can do this 9 more times before it's out of authorized shares and needs to ask the shareholders for permission to increase the number.
answered Jan 1 at 3:57
DanielDaniel
1,056517
It's not really true to say that having unissued stock means that the company is not 100% owned. It'd be more accurate to say that the unissued shares are assets of the company (and therefore, indirectly, of the current shareholders). The company can issue the stock to others in exchange for something that increases the value of the company by a comparable amount (e.g. cash or work). This makes it a fair trade which should not decrease the value of existing shareholders' stock.
For example, suppose company X has 10 issued shares of stock and a total of 20 authorized shares, (leaving 10 unissued). The valuation of the company is $10, meaning each owned share is worth $1. Now someone comes and gives the company $1 for a new share of stock. Now the company has an extra dollar it didn't have before so it's now worth $11. There are also now 11 issued shares of stock, so each one is still worth a dollar. The original shareholders have been "diluted" in that they now own a smaller percentage of the company, but due to the increase in the company's value, they're just as well-off as they were before. Company X can do this 9 more times before it's out of authorized shares and needs to ask the shareholders for permission to increase the number.
answered Jan 1 at 3:57
DanielDaniel
1,056517
edited Jan 1 at 4:15
answered Jan 1 at 3:57
DanielDaniel
1,056517
answered Jan 1 at 3:57
DanielDaniel
1,056517
answered Jan 1 at 3:57
DanielDaniel
1,056517
1,056517
2
It's worth pointing out that while the value of the stock doesn't go down, the voting power that shareholders will have has gone down... it's hard to say what's better out of owning 1/10 of a $10 company and owning 1/11 of an $11 company, but I can see people being potentially upset about it.
– Ben Millwood
Jan 1 at 12:42
1
@Ben for sure. That's part of why the shareholders have to authorize more stock. Also, presumably shareholders own the company because they think it will eventually be worth more than it is today per share. If that's the case, diluting their percentage of ownership also dilutes their share of the value of the company's growth.
– Daniel
Jan 1 at 12:48
Hmm. Sort of. If you think the company will grow by $X then yes, your share of that has been diluted. If you think the company will grow by Y% then the stock issuance doesn't affect that. So it depends what you think the bottleneck on growth will be.
– Ben Millwood
Jan 1 at 12:52
@BenMillwood Presumably, the company would only do that if it could do something useful with the $1 it got.
– David Schwartz
Jan 3 at 7:04
add a comment |
2
It's worth pointing out that while the value of the stock doesn't go down, the voting power that shareholders will have has gone down... it's hard to say what's better out of owning 1/10 of a $10 company and owning 1/11 of an $11 company, but I can see people being potentially upset about it.
– Ben Millwood
Jan 1 at 12:42
1
@Ben for sure. That's part of why the shareholders have to authorize more stock. Also, presumably shareholders own the company because they think it will eventually be worth more than it is today per share. If that's the case, diluting their percentage of ownership also dilutes their share of the value of the company's growth.
– Daniel
Jan 1 at 12:48
Hmm. Sort of. If you think the company will grow by $X then yes, your share of that has been diluted. If you think the company will grow by Y% then the stock issuance doesn't affect that. So it depends what you think the bottleneck on growth will be.
– Ben Millwood
Jan 1 at 12:52
@BenMillwood Presumably, the company would only do that if it could do something useful with the $1 it got.
– David Schwartz
Jan 3 at 7:04
2
2
It's worth pointing out that while the value of the stock doesn't go down, the voting power that shareholders will have has gone down... it's hard to say what's better out of owning 1/10 of a $10 company and owning 1/11 of an $11 company, but I can see people being potentially upset about it.
– Ben Millwood
Jan 1 at 12:42
It's worth pointing out that while the value of the stock doesn't go down, the voting power that shareholders will have has gone down... it's hard to say what's better out of owning 1/10 of a $10 company and owning 1/11 of an $11 company, but I can see people being potentially upset about it.
– Ben Millwood
Jan 1 at 12:42
1
1
@Ben for sure. That's part of why the shareholders have to authorize more stock. Also, presumably shareholders own the company because they think it will eventually be worth more than it is today per share. If that's the case, diluting their percentage of ownership also dilutes their share of the value of the company's growth.
– Daniel
Jan 1 at 12:48
@Ben for sure. That's part of why the shareholders have to authorize more stock. Also, presumably shareholders own the company because they think it will eventually be worth more than it is today per share. If that's the case, diluting their percentage of ownership also dilutes their share of the value of the company's growth.
– Daniel
Jan 1 at 12:48
Hmm. Sort of. If you think the company will grow by $X then yes, your share of that has been diluted. If you think the company will grow by Y% then the stock issuance doesn't affect that. So it depends what you think the bottleneck on growth will be.
– Ben Millwood
Jan 1 at 12:52
Hmm. Sort of. If you think the company will grow by $X then yes, your share of that has been diluted. If you think the company will grow by Y% then the stock issuance doesn't affect that. So it depends what you think the bottleneck on growth will be.
– Ben Millwood
Jan 1 at 12:52
@BenMillwood Presumably, the company would only do that if it could do something useful with the $1 it got.
– David Schwartz
Jan 3 at 7:04
@BenMillwood Presumably, the company would only do that if it could do something useful with the $1 it got.
– David Schwartz
Jan 3 at 7:04
add a comment |
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