The term authorized share capital denotes the entire portion of a company’s shares which can be sold to investors.
A public company's authorized share capital must be clearly laid out in its statutes. A company may issue shares up to the value of its entire authorized share capital during its initial public offering (IPO), or it may reserve a portion of its authorized share capital for future offerings.
At no point can a public company’s stock be made up of more shares than their authorized share capital dictates. However, it is possible for a company to increase or decrease its authorized share capital with the approval of its shareholders.
Understanding a company’s authorized share capital is crucial for investors who plan to invest in that company because it can seriously impact the future value of their shares (see also: Stock dilution).
The issuing of new shares increases the supply of a stock, which often leads to a devaluation of existing shares. The higher a company’s authorized share capital and the higher the number of shares which can still be issued, the higher the risk of devaluation of existing shares.
Example: A company’s statutes dictate an authorized share capital of 1 million shares. When the company goes public, it issues 500,000 shares which it offers during its IPO. The company still reserves the right to issue up to 500,000 additional shares. If the company were to exercise its right to issue the 500,000 remaining shares, the supply of the company’s shares would double. Unless demand for the stock were exceptionally high, the rise in supply could temporarily or permanently exceed demand, causing all its shares to decrease in value.