# of shares in a company?

You hear about a company offering, say, 5 million shares of stock—well, 5 million out of how many? Do they just pick an arbitrary number or is there some formula?

“Eppur, si muove!” - Galileo Galilei

It’s not exactly arbitrary, but the formula depends on several factors.

Let’s say XYZ company is worth $10 million. It has already issued 1 million shares, so each share has a value of $10. Now, the company wants to raise cash, or it sees that a ruthless takeover artist is accumulating shares, and it wants to make it harder for him. The solution is to issue more shares.

The formula comes into play because if XYZ issues, let’s say, another 1 million shares, it doesn’t automatically make the company worth twice as much. All those people who bought shares at $10 each are going to be pretty mad when they wake up and discover their shares are now worth half as much. So the company has to balance how many new shares the market will absorb without diluting the value of the existing shares so much that the current stockholders will rise up and make life hell for the CEO.

I once incorporated a small business. IIRC, we were allowed to pick how many shares of stock the business had. My understanding is the total # of shares can change, but there’s some legal gobbledegook that you have to go through to do it.

For a newly-formed corporation, Athena is right. The incorporator(s) pick an arbitrary number for the shares authorized. (Not all of those shares must be issued, however.) That number can be changed at will by an appropraite filing with the state.

Also, publicly traded corporations generally want their per-share value to be neither too small nor too large. (If AT&T only had 1000 issued shares, the per share value would be so high as to prevent a small investor from buying AT&T stock. On the other hand, if a corporation had too many shares issued, to the point where each one was worth cents rather than dollars, that would impede trading (or at least investor perception) as well.

The price manipulations are most commonly achieved by a reorganization of the outstanding shares referred to as forward or reverse splits. This is when a corporation declares the outstanding stock split by some factor, but the market value of the total number of shares remains the same.

For instance, if you hold 10 shares of XYZ valued @ $10 per share (total market value $100.00), and a 2 for 1 forward split takes place, you would be issued 10 additional shares. The market value is adjusted for the stock split, so the shares would now be valued @ $5 per share. You now hold 20 shares @ $5 per share, still $100.00 market value, although the price of an individual share has just been halved.

Reverse splits work much the same way, except that the market value of an individual share increases.

I don’t recall if the “stock split” shares fall under the original charter a newly-born company files with the SEC, which does have an actual number of shares issuable.

(Does my background in Wall Street Internal Audit show?)