Demystifying Stock

By Rick Bell Wednesday, February 25, 2009

Stock sounds like a substantial word, doesn’t it? It reminds one of livestock (cattle) or rolling stock (rail cars), or stock-in-trade (physical inventory), but it is none of these. Shares of Stock in a company are worth just about whatever you can get for them, and that can fluctuate, as we’ve all experienced watching the Stock Market. In reality, they are a piece of paper that could be worth any amount.

Shares of stock are first authorized by the company’s Certificate of Incorporation (or later amendments) that state the number of shares the company has in total. Authorized means the total number you can own or sell. Authorized shares can be increased by filing an amendment to the Certificate of Incorporation with the Secretary of State’s Office. If a majority of directors and stockholders approve, you can raise the number of shares and sell them to raise capital for the company as often as you need to.

Issued shares is the number of authorized shares that have actually been issued to individuals or corporate owners of the company including founders, managers, insiders and investors.

Stock in private companies is valued differently than stock in public companies. We’ll talk more about that in later blog posts.

Just to complicate things, it must be mentioned that a Delaware General Corporation can have more than one “Class” of stock. Specifically, every corporation must start with one class of “Common” stock that is entitled to one vote per share. On top of that, you might want to consider a separate class of stock authorized as “Preferred” shares that you can use to raise money or retain power. An upcoming blog post will focus on Preferred Stock and its uses.

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