Shares of Common Stock

tamer hamed 11:55:00 PM
A corporation files its articles of incorporation with the state where they are organized. These articles disclose the name and purpose of the business, its address, and how many shares of stock the corporation is authorized to issue, known as the authorized shares. If a public company is authorized to issue 1,000,000 shares of common stock, they will probably not sell all of them at once. When they first sell shares to the public during their IPO, the number they issue is known as issued shares. Let's say this corporation could issue 1 million, but they only issue 600,000 shares. If so, there would be 600,000 issued shares after the public offering. And, at that point, the shares outstanding would also be the 600,000 that were issued in the IPO.

For many reasons, the corporation might buy back some of those shares. These shares, which were issued but repurchased, are called treasury stock. Treasury stock has no voting rights and pays no dividends. The benefit to the shareholders who remain is that the value of their existing stock tends to rise when the company is reducing the number of shares on the secondary market. If this corporation had issued 600,000 shares and then purchased 200,000 for the treasury, they would have 400,000 shares outstanding.

600,000 Issued
-200,000 Treasury
400,000 Outstanding

When we look at a company's earnings per-share, or EPS, on the income statement, we only count the outstanding shares. That's why the company can boost its earnings per-share (EPS) by repurchasing their outstanding stock on the secondary market. Even if the company's total earnings stayed the same, the earnings per-share would rise if the company were reducing the number of outstanding shares. For example, if the company earned $1 million in net income, that is an earnings per-share of $1.67 when there were 600,000 shares outstanding. However, after the company buys back 200,000 shares for the treasury, that same $1 million profit would be $2.50 of earnings per-share.

Treasury stock doesn't vote, so the officers and directors of the company, who own
large positions in the stock, end up with more influence during corporate elections after a large share buyback. Also note that the cash used buying back shares is reflected on the company's statement of cash flows under financing activities.

Common stock is easy to transfer to another party. It can be sold, donated, gifted, or inherited. The issuer of the stock hires a financial institution to keep track of the transfers of ownership, and they're called the transfer agent. The transfer agent keeps the ownership records of the company's stock. They deal with issuing and validating stock and bond certificates, recording name changes when investors sell their certificates, and re-issuing lost, stolen, or destroyed certificates. If there's a problem with the ownership records of the security, contact the transfer agent. They can validate or re-issue certificates, for a fee.

With just one share of some stocks worth thousands of dollars, most investors don't want the responsibility of protecting the certificates from damage, theft, or misplacement. So, rather than having the securities shipped, they could have the broker-dealer transfer the securities into their name and then hold them in the firm's vault. That method is called either “transfer or hold" or safekeeping. The firm would likely charge a fee to do that. So, what most investors do is have the broker-dealer hold the securities in street name. This way, the broker-dealer is the named or nominal owner of the securities and the customer is the beneficial owner of the securities.


But, whatever the customer chooses, the fact is most customers these days have never seen a stock or bond certificate because their broker-dealer holds them in street name and may have them on deposit at centralized "depositories" such as the . From there, the securities are transferred through electronic entries only, which explains why many registered representatives have also never seen a stock or bond certificate. From the Depository Trust Company's website at www.dtc.org we see how things currently work:

With the implementation of direct registration, investors have three securities ownership options:

Physical Certificates: Certificates are registered and issued in the investor's name. The investor will receive all mailings directly from the issuer or its transfer agent, including dividend or interest payments, annual reports, and proxies.

Street Name Registration: Securities are registered in the street name of the investor's broker-dealer. While no physical certificate will be issued to the investor, the broker-dealer will issue, at least quarterly, account statements of the investor's holdings. The broker-dealer will pay dividends or interest to the investor, as well as provide the investor with mailing material from the issuer or transfer agent.

Direct Registration: This option allows the investor to be registered directly on the books of the transfer agent without the need of a physical certificate to evidence the security ownership. While the investor will not receive a physical certificate, he or she will receive a statement of ownership and periodic (at least yearly) account statements. Dividend or interest payments, proxy materials, annual reports, etc., will be mailed from the issuer or its transfer agent.

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