Common Stock
December 16, 2008 – 2:21 amThere are three major types of common stock:
- Par value
- No par value, but a stated value
- No par value
Par value is an arbitrary amount that is assigned to each share by the company. It has no relation to market value. Some jurisdictions levy taxes on the company based on the par value of the stock that has been issued. For this reason, many companies set the par value at a very low number (such as $0.01). Aside from its use in levying taxes, par value doesn’t really serve any purpose.
Each company will file with the appropriate government body (usually the secretary of state in the state chosen for incorporation) a form called the Articles of Incorporation. In addition, the company will develop or buy another set of forms called the bylaws. These two sets of forms set the maximum number of shares the company may issue. This maximum is referred to as the authorized number of shares. The number of
shares that have been sold to the public is called the number of shares issued (this can be the same as or less than the authorized number of shares).
Sometimes a company will go into the stock market and buy back some of the shares it had previously sold. There can be many reasons for this, such as an attempt to increase the stock price (when there are fewer shares outstanding, there is likely to be an increased demand for the stock), or perhaps a need to deliver stock to fulfill the company’s obligation to a stock option or bonus plan. In any event, the stock repurchased by the company is called treasury stock. If there is a difference between the number of shares issued and the number of shares outstanding, it is because of treasury stock. Once the stock has been issued to the public, it is counted as issued, but if it is repurchased by the company and held as treasury
stock, it is not included in the total of the stock outstanding. If a company has no treasury stock, then the figures for the issued and outstanding shares will be the same.
Taken From : Accounting Demystified