Preparing for the FINRA Series 7 exam includes mastering the distinctions and calculations related to corporate shares. This article will guide you through the process of understanding authorized, issued, and outstanding shares, providing practical examples and exercises to ensure success.
Understanding Corporate Shares
When a corporation is formed, it is authorized to issue a certain number of shares. This number represents the maximum amount of shares that the corporation can legally create.
Authorized Shares: These are the total shares that a corporation is allowed to issue as per its corporate charter.
Issued Shares: These are the shares that have been actually distributed to shareholders, including both public and private investors.
Outstanding Shares: These refer to shares that are currently held by shareholders, excluding any shares repurchased by the corporation itself.
To understand and calculate different share categories, it is essential to know a few key formulae:
- Outstanding Shares = Issued Shares - Treasury Shares
- Authorized but Unissued Shares = Authorized Shares - Issued Shares
Using these basic formulae, let’s solve some example problems to clarify these concepts.
Step-by-Step Example Calculations
Example 1: Calculating Outstanding Shares
Problem: A corporation has authorized 1,000,000 shares. It has issued 700,000 shares, and it holds 50,000 shares in its treasury. Calculate the outstanding shares.
Solution:
Outstanding Shares = Issued Shares - Treasury Shares
Outstanding Shares = 700,000 - 50,000
Outstanding Shares = 650,000
Example 2: Determining Authorized but Unissued Shares
Problem: A corporation has authorized 1,500,000 shares but has only issued 900,000 shares. What is the number of authorized but unissued shares?
Solution:
Authorized but Unissued Shares = Authorized Shares - Issued Shares
Authorized but Unissued Shares = 1,500,000 - 900,000
Authorized but Unissued Shares = 600,000
Additional Practice Problems
Problem 1: A company has an authorization to issue 2,000,000 shares. If it has already issued 1,200,000 shares and holds 100,000 as treasury stock, how many shares are outstanding?
Using the formula:
Outstanding Shares = Issued Shares - Treasury Shares
Outstanding Shares = 1,200,000 - 100,000
Outstanding Shares = 1,100,000
- Authorized Shares: The maximum number of shares a corporation can issue as stated in its articles of incorporation.
- Issued Shares: Shares that have been allocated and sold to shareholders, including insiders who own restricted shares.
- Outstanding Shares: Shares that have been issued and are currently held by shareholders.
- Treasury Shares: Shares that were issued but were later reacquired by the corporation and held in the company’s treasury.
Additional Resources
- FINRA Series 7 Exam Content
- Securities and Exchange Commission (SEC) Basics
- Investopedia’s Corporate Stock Articles
Interactive Quizzes
To ensure you have grasped the concept of corporate shares thoroughly, try the quizzes below.
### What are outstanding shares?
- [x] Shares currently held by shareholders that are not treasury shares
- [ ] Shares that are only authorized by the corporation
- [ ] Shares the company plans to issue in the future
- [ ] Shares returned to the company as donations
> **Explanation:** Outstanding shares are those currently held by all shareholders, excluding treasury shares.
### How do you calculate authorized but unissued shares?
- [x] Authorized Shares - Issued Shares
- [ ] Issued Shares + Outstanding Shares
- [x] Total Shares - Outstanding Shares
- [ ] Treasury Shares + Issued Shares
> **Explanation:** Authorized but unissued shares are the difference between authorized shares and issued shares.
### Issued shares include which of the following?
- [x] Shares sold to the public and private investors
- [ ] Only shares that have been repurchased
- [ ] Shares planned for future sale
- [ ] Shares held as collateral
> **Explanation:** Issued shares are those sold and allocated to investors.
### If a company has repurchased its own stock, those shares are called?
- [x] Treasury Shares
- [ ] Issued Shares
- [ ] Outstanding Shares
- [ ] Preferred Shares
> **Explanation:** Repurchased shares held by the issuing company are called treasury shares.
### Which formula can calculate outstanding shares?
- [x] Issued Shares - Treasury Shares
- [ ] Treasury Shares + Authorized Shares
- [x] Authorized Shares - Unissued Shares
- [ ] Issued Shares + Authorized Shares
> **Explanation:** Outstanding shares are calculated by subtracting treasury shares from issued shares.
### What’s the significance of authorized shares?
- [x] They determine the legal limit a corporation can issue
- [ ] They represent stocks currently in circulation
- [ ] They denote shares held in reserve
- [ ] They count investments from international entities
> **Explanation:** Authorized shares represent the ceiling of shares a company may issue, as per its charter.
### Which of the following affects outstanding shares?
- [x] Stock buybacks
- [ ] Market fluctuations
- [x] Issuance of new shares
- [ ] Change in stock par value
> **Explanation:** Stock buybacks reduce outstanding shares, while issuing new shares increases them.
### What happens when a corporation issues more shares than authorized?
- [x] They must seek shareholder approval to amend the articles
- [ ] The excess shares automatically become treasury shares
- [ ] The company faces a financial penalty
- [ ] The shares are canceled immediately
> **Explanation:** Issuing more than the authorized amount requires amending the corporate articles.
### Are issued shares always equal to outstanding shares?
- [x] No, because of treasury shares
- [ ] Yes, because they reflect company growth
- [ ] Yes, since all shares are eventually bought
- [ ] No, as they depend on market conditions
> **Explanation:** Issued shares minus treasury shares equal outstanding shares; they are often not the same due to buybacks.
### Authorized shares include outstanding and issued shares.
- [x] True
- [ ] False
> **Explanation:** Authorized shares encompass all shares a company can issue, which include both issued and authorized shares not yet issued, of which outstanding is a part.
Summary
Understanding corporate share structures is crucial for mastering the FINRA Series 7 exam. By getting a strong grasp on authorized, issued, and outstanding shares through calculations and conceptual understanding, you’ll be well-prepared for your securities representative role.