What are the Outstanding Shares?
Outstanding shares are the shares available with the shareholders of the company at the given point of time after excluding the shares which are bought back by the company and it is shown as the part of the owner’s equity in the liability side of the balance sheet of the company.
A company also often keeps a portion of its outstanding shares of stock in its treasury, from both initial stock issue as well as stock repurchases. These are called “treasury shares” and are not included in the balance. Increasing treasury shares will always result in decreases or (and vice-versa).
Outstanding Shares vs. Authorized Shares
Outstanding shares differ from Authorised shares (issued shares) as authorized shares are the number of shares that a corporation is legally allowed to issue. In contrast, outstanding stocks are the ones already issued in the market.
Let us take an example of McDonald’s.
Here we note that Authorized Common Shares are 3.5 billion. However, outstanding stocks issued are 1.66bn only.
- So at any given point in time, outstanding stocks number cannot be higher than the number of authorized shares. Generally, the company authorizes more shares than the actual issuance size. The key reason for it is efficiency and practicality.
- If the company issue all the authorized shares but then need to grant more shares in the future, the company would need to authorize more shares at that point.
- It requires a board and stockholder vote, and then a document to be filed. This process costs money (legal fees and filing fees). However, if the company has excess authorized shares, it can issue those with much less effort, typically just approval of the board of directorsBoard Of DirectorsThe Board of Directors (BOD) refers to a corporate body comprised of a group of elected members who represent the interests of the company and its shareholders. They are at the top of the corporate hierarchy and are responsible for ensuring that the company meets its goals efficiently..
Outstanding Shares Formula
Below is the Formula
- The number of stocks outstanding is equal to the number of issued shares minus the number of shares held in the company’s treasury.
- It’s also equal to the float (shares available to the public and excludes any restricted shares, or shares held by company officers or insiders) plus any restricted shares.
For example, if a company issues a total of 1000 shares. 600 shares are issued as floating shares to the general public, 200 shares are issued as restricted shares to company insiders, and 200 are kept in the company’s treasury. In this case, the company has a total of 800 outstanding shares and 200 treasury shares.
Two Types of Shares Outstanding
- Basic Share
- Diluted Share
Basic shares mean the number of outstanding stocks currently outstanding, while the fully diluted number takes into account things such as warrants, capital notes, and convertible stock. In other words, the fully diluted number of Stocks outstanding tells you how many outstanding stocks there could potentially be.
Warrants are instruments that give the holder a right to purchase more outstanding stock from the company’s treasury. Whenever warrants are activated, stocks outstanding increase while the number of treasury stocks decreases. For example, suppose XYZ issues 100 warrants. If all these warrants are activated, then XYZ will have to sell 100 shares from its treasury to the warrant holders.
Why Shares Oustanding Keep on Changing?
Outstanding stocks will increase when the company increases its share capitalShare CapitalShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side. by selling new stock to the public or when it declares a stock splitStock SplitStock split, also known as share split, is the process by which companies divide their existing outstanding shares into multiple shares, such as 3 shares for every 1 owned, 2 shares for every 1 held, and so on. The company's market capitalization remains unchanged during a stock split because, while the number of shares grows, the price per share decreases correspondingly. (company divides its existing shares into multiple shares to improve liquidity).
Conversely, stocks outstanding will decrease if a firm completes a share buyback or a reverse stock split (consolidation of a corporation’s shares according to a predetermined ratio). Buyback is the repurchase of its shares by the company. It decreases the number of outstanding stocks in the public and increases the treasury shares amount.
How Shares outstanding Affect Investors?
A higher number of stocks outstanding means a more stable company given greater price stability as that it takes many more shares traded to create a significant movement in the stock price. Contrary to this, the stock with a much lower number of outstanding stocks could be more vulnerable to price manipulation, requiring much fewer shares to be traded up or down to move the stock price.
Several outstanding stocks are an essential value for any investors as it is included in the latest market capitalizationMarket CapitalizationMarket capitalization or market cap is the total market value of all the outstanding shares and is calculated by multiplying the outstanding shares with the current market price. Investors use this ratio to determine the company's size rather than using total sales or total assets. and earning per share calculation, as shown below:
Company A has issued 25,800 shares and has offered 2,000 shares to two partners, and has retained 5,500 stocks in the treasuryStocks In The TreasuryTreasury Stock is a stock repurchased by the issuance Company from its current shareholders that remains non-retired. Moreover, it is not considered while calculating the Company’s Earnings Per Share or dividends. .
- Outstanding shares Formula : Shares issued – treasury shares – restricted shares = 25,800 – 5,500 – (2 x 2,000) = 16,300.
- Suppose, stock is currently at $35.65. Therefore, the market capitalization of the firm is 16,300 x $35.65 = $581,095.
- Company A has a net income of $12,500 as per the latest financials. Therefore, the firm’s earnings per share is $12,500 / 16,300 = $0.77.
After three months, the company’s management decides a share buybackShare BuybackShare buyback refers to the repurchase of the company’s own outstanding shares from the open market using the accumulated funds of the company to decrease the outstanding shares in the company’s balance sheet. This is done either to increase the value of the existing shares or to prevent various shareholders from controlling the company. of 1,000 shares. The stock price after 3 months is $36.88.
- Therefore outstanding stock after three months = 16,300 – 1, 000 = 15,300.
- Market cap after three months = 15,300 x $36.88 = $564,264
- EPS after three months = $12,500 / 15,300 = 0.82
- As the number of outstanding stock decreases by 1,000, the company’s EPS increases by 6.54%.
- Also, stocks outstanding is an important parameter used in the calculation of Price to book value (P/B ratio), which is an indicator of how much shareholders are paying for the net assets of a companyNet Assets Of A CompanyThe net asset on the balance sheet is the amount by which your total assets exceed your total liabilities and is calculated by simply adding what you own (assets) and subtract it from whatever you owe (liabilities). It is commonly known as net worth (NW)..
Outstanding shares are the shares owned by stockholders, company officials, and investors in the public domain, including retail investorsRetail InvestorsA retail investor is a non-professional individual investor who tends to invest a small sum in the equities, bonds, mutual funds, exchange-traded funds, and other baskets of securities. They often take the services of online or traditional brokerage firms or advisors for investment decision-making., institutional investors, and insiders. However, stocks outstanding does not include treasury stock.
Video on Outstanding Shares
This article has been a guide to Shares Oustanding, meaning, definition, formula, and types. Here we also discuss top outstanding shares vs. authorized shares along with practical examples and why an investor should care about stocks outstanding. You may also go through the following recommended articles on basic accounting –