Definition: Shares, often called stocks or shares of stock, represent the equity ownership of a corporation divided up into units, so that multiple people can own a percentage of a business. When a business decides to incorporate, a corporate charter is filed with the state government. Many corporations tend to incorporate and domicile in Delaware because of the freedom and insignificant reporting fees required by the Delaware government. Regardless, most corporations are organized in their home state.
The charter sets the number of shares that are authorized. You can think of the authorizing process as creating the amount of shares that can later be sold to investors. The authorized number of shares varies between companies and represents the total number of shares that the company can use for equity financing.
Corporations typically authorize more shares than they want to issue, so they can ensure that the company will be able to raise capital from new investors in the future.
The corporate charter also sets the par value for each share. Not all companies are required to set a par value by law, but most do for a variety of reasons.
When the newly formed corporation issues shares to investors, these investors become shareholders. These issued shares are recorded in the common stock equity account on the balance sheet. Most balance sheets list out the number of shares outstanding as well as the total number of shares that are authorized.
Corporations often issue several different classes of stock. The main two classes are common shares, also called capital stock, and preferred shares. Common shareholders have an equity stake in the business as well as a voting right equal to their percentage of ownership. Common shareholders elect the board of directors who in turn appoint the executives to run the company.
Preferred shareholders, on the other hand, don’t typically have voting rights. Instead, they maintain the preferred right to dividends that are issued.