Share Categorization Questions on the Series 7 Exam
All publicly held corporations have a certain quantity of shares that they can sell based on their corporate charter. The Series 7 exam covers how these shares are broken down into a few categories depending on whether the issuer or investors hold the shares:
Authorized shares: Authorized shares are the number of shares of stock that a corporation can issue. The issuer’s bylaws or corporate charter (a document filed with the state that identifies the names of the founders of the corporation, the company’s objectives, and so on) states the number of shares the company is authorized to sell. However, the issuer usually holds back a large percentage of the authorized stock.
Issued shares: Issued shares are the portion of authorized shares that the issuer has sold to the public to raise money.
Outstanding shares: Outstanding shares are the number of shares that are in investors’ hands. This quantity may or may not be the same number as the issued shares. At times, an issuer may decide to repurchase its stock in the market to either help increase the demand of the stock trading in the market or to avoid a hostile takeover. Stock that the issuer repurchases is called treasury stock.
The standard formula for outstanding shares follows:
The following question tests your understanding of outstanding shares.
ZZZ Bedding Corp. is authorized to issue 2,000,000 shares of common stock. However, ZZZ issues only 800,000 shares to the public. One year later, ZZZ repurchases 150,000 shares to increase the demand on the outstanding shares. How many shares does ZZZ have outstanding?
The right answer is Choice (A). You probably didn’t have too much difficulty with this one. All the question is asking is how many shares are still outstanding in the market. Check out the following equation:
Because ZZZ issued only 800,000 shares of the 2,000,000 that it’s authorized to issue, the most ZZZ ever had in the market was 800,000. However, a year after issuing those shares, ZZZ repurchased 150,000 shares, giving the company treasury stock. Therefore, the amount of outstanding shares is 650,000.