The issuance of common shares can be traced back to Roman times when the empire contracted out services to large private groups called publicani. The shares were called socii for large co-operatives and particulae for smaller companies.
Common shares of a company represent an ownership interest in the net assets of the corporation. Both publicly traded and private companies issue common shares.
When a corporation is formed it will draft a document called its Articles of Incorporation, which among other things will define the maximum number of common shares the company may issue to investors. The maximum number of shares the company is permitted to issue is referred to as the company’s Authorized Capital Stock (sometimes referred to as Authorized Share Capital or Nominal Capital).
The number of shares authorized for issuance is usually much greater than the actual number of common shares issued. By issuing fewer shares than the company’s maximum Authorized Capital, management maintains the flexibility to raise additional capital by issuing common shares, it can pay for acquisitions by issuing shares and issue shares when the approval is granted to “Split” the company’s issued common shares. (From time to time, a company may elect to issue additional shares to existing shareholders in an effort to lower the shares trading price making the shares more attractive to investors.)
A company’s Authorized Capital can be changed with approval of shareholders.
In theory, the company holds all of the Authorized Capital Stock registered in its own name, as owner. The shares owned by the company are held in the company’s Treasury.
Thus, as the company sells shares to investors, they are actually selling shares out of their Treasury and transferring ownership of those shares from the company to the new investor.
The company’s Authorized Capital Stock is comprised of the shares registered in the company’s name, held in the Treasury, and the Issued Capital or shares sold from the Treasury and registered in the investor’s name.
A corporation can be authorized to issue more than one class of common shares.
Ownership of common shares is documented by the company issuing a stock certificate. The stock certificate is a legal document, which identifies the owner and the ownership interest. It will state the number of shares owned by the shareholder and the specific characteristics of the shares such as the par value, if any, and the class of the shares.
Owning common shares of an incorporated business, entitles the shareholder to a proportional interest in the net residual value of the business, but limits their liability to the amount of their invested capital. Should the business prosper and grow, the shares should also increase in value. Should the business fail and be forced into bankruptcy, the common shares will decrease in value in proportion to the net value of the business’ assets. Should the business’ liabilities exceed its assets, the shareholder is not responsible for any shortfall in the assets.
Members' Note: InvestingForMe conveniently lists the common shares of 98 individual Canadian companies, grouped within the 12 different market sectors, for easy reference and comparison, at a glance. Each common share is accompanied by detailed stock market quotes, interactive charting, current news and financial information helping to make your research and investment decisions easier. Simply visit our Data Room - TSX Sector Shares.
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