If your business is structured as a traditional corporation, as more than a million small businesses are as of publication, it's important to understand the basics of stock. Each share of stock represents a piece of ownership in the company. The size of that piece -- what percentage of ownership a share of stock represents -- depends on how much stock the company has in the hands of investors.
Most companies have only one class of stock: common stock. As the name suggests, common stock is a company's basic stock. The more shares you own, the more of the company you own, and if you own a majority of common shares, you effectively own the company. When you see references to any company's "stock price," it's the common stock price that's being discussed.
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When a company incorporates, it files a document with its state government called its articles of incorporation. This document gives the company its official name and spells out details about how it will be organized. One key piece of information is the number of "authorized shares." That's how many shares of stock the company could distribute if it chose to. Companies often set this number extremely high -- in the millions or billions -- to account for growth in the future. The company is not required to actually sell all its authorized shares, and many don't sell anything close to the authorized total.
Once a company distributes a share of stock -- either by selling it to an investor or giving it to an employee as compensation -- that share becomes an "issued" share. Companies can't issue more shares than are authorized by their articles of incorporation. If they need to issue more, they typically have to go to their shareholders for approval to increase the number of authorized shares.
A share in the hands of a stockholder is an "outstanding" share. Outstanding shares have voting rights and are entitled to dividends -- distributions of profits. And when a company calculates its earnings per share, it does so using the number of outstanding shares. For many companies, all issued shares are still outstanding, so the numbers of each are the same. However, if a company buys back its own stock from investors, then the shares it repurchases are still counted as issued but are no longer outstanding. Stock owned by the company itself, called "treasury stock," does not collect dividends and has no voting rights. When a company resells a share from its treasury, that share becomes outstanding again, while the number of issued shares does not change.