While talking about share capital of a company it is important to recognize the difference between authorized shares and outstanding shares, because knowledge of it helps the investors in taking decision whether to invest in a company or not. Let’s look at the difference between the two
Authorized shares refer to the maximum number of shares that a company can issue to the shareholders. It is the share capital which the company is authorized to issue by its memorandum of association and it can only be increased and decreased through a vote by the shareholders. So for example if the memorandum of association of the company provides that 1 million shares are authorized then a company can issue 1 million shares only and not more unless it takes prior approval of shareholders through voting.
While authorized share provides the upper limit beyond which company cannot issue the shares, while outstanding shares refer to the number of stocks that a company actually has issued to the shareholders. It is always less than the authorized shares. In other words it represents the total number of shares that can be bought and sold by the public in the stock market.
A company which has low number of outstanding shares will not have enough liquidity when it comes to trading of stock in stock market and hence investor will not be able to buy or sell it easily because of low liquidity.
In simple words authorized share can be compared to a glass of water which is full while outstanding shares can be compared to a half filled glass of water.