What are Outstanding Shares?
Outstanding shares are the shares available with the company’s shareholders at the given time after excluding the shares that are repurchased by the company, and it is shown as part of the owner’s equity in the liability side of the balance sheet of the company. However, they keep fluctuating in value due to various reasons.
A company also often keeps a portion of its total outstanding shares of stock in its treasury from both initial stock issues and stock repurchase. These are called “treasury shares” and are not included in the balance. Increasing treasury shares will always result in decreases and vice-versa.
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Outstanding Shares Explained
Outstanding shares are those 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, outstanding stocks do not include treasury stock.
Total outstanding shares represent the number of shares of a company’s stock that are currently held by all its shareholders, including institutional investors, company insiders, and the public. The company has issued these shares, and are in the hands of investors who may buy and sell them on the open market.
Outstanding shares play a crucial role in determining a company’s market capitalization, a key metric for investors assessing a firm’s overall value. The market cap is calculated by multiplying the current market price per share by the total number of outstanding shares. This metric provides investors with insights into a company’s size and relative importance within the market.
It is essential to note that outstanding shares can fluctuate due to events such as stock buybacks or secondary offerings. Stock buybacks, for instance, reduce the number of outstanding shares, potentially boosting the company’s earnings per share (EPS) and making each share more valuable.
Investors often track changes in outstanding shares as part of their broader analysis when making investment decisions. Understanding the dynamics of outstanding shares is integral to comprehending a company’s financial health and market position.
Video on Outstanding Shares
Let us understand the formula that shall act as the basis of our understanding and the formation of the outstanding shares equation through the discussion below.
- 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 are issued as restricted shares to company insiders, and 200 are kept in the company’s treasury. In this case, the company has 800 outstanding shares and 200 treasury shares.
Let us understand the different types of outstanding shares equation through the explanation below.
- Basic Share
- Diluted ShareDiluted ShareDiluted shares can be defined as the total number of shares that the company has at a particular point that can be converted into the normal share by the holders (convertible bond, convertible preferred stock, employee stock options). It is done by exercising the right to alter such shares into ordinary shares.
Basic shares mean the number of outstanding stocks currently outstanding, while the fully diluted number considers 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, XYZ will have to sell 100 shares from its treasury to the warrant holders.
Why Do They Keep on Changing?
Total 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 splits refer to the process whereby a company increases its number of shares, reducing the per-share price of the stocks. (company divides its existing shares into multiple shares to improve liquidity).
Conversely, outstanding stocks will decrease if a firm completes a share buyback or a reverse stock split (consolidating a corporation’s shares according to a predetermined ratio). Buyback is the repurchase of its shares by the company. As a result, it decreases the number of outstanding stocks in the public and increases the amount of treasury shares.
How Does It Affect Investors?
A higher number of outstanding stocks means a more stable company given greater price stability as 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 is the market value of a company’s outstanding shares. It is computed as the product of the total number of outstanding shares and the price of each share. and earning per share calculation, as shown below:
Company A has issued 25,800 shares, offered 2,000 shares to two partners, and 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 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 on 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, stock 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 a company’s net assetsNet 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)..
Where To Find?
Let us understand where investors and analysts can find the data regarding the total outstanding shares of a company through the points below.
- Company Filings (SEC): Investors can access a company’s Securities and Exchange Commission (SEC) filings, particularly the quarterly and annual reports (Forms 10-Q and 10-K), to find detailed information on outstanding shares.
- Financial News Websites: Reputable financial news websites often provide up-to-date information on a company’s outstanding shares. This information is regularly reported as part of financial news coverage.
- Online Brokerage Platforms: Many online brokerage platforms offer a company’s key financial metrics, including outstanding shares, as part of their stock profile.
- Company’s Investor Relations Website: Companies typically maintain an investor relations section on their websites, where they publish essential financial data, including the number of outstanding shares.
- Stock Exchanges: Stock exchanges, where the company’s shares are listed, often provide relevant information on outstanding shares as part of their reporting and data services.
Outstanding Shares vs. Issued Shares
Outstanding shares equation differ from issued (Authorized) as authorized shares are the number of shares 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 issues all the authorized shares but then needs to grant more 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 DirectorsBoard of Directors (BOD) refers to a corporate body comprising a group of elected people who represent the interest of a company’s stockholders. The board forms the top layer of the hierarchy and focuses on ensuring that the company efficiently achieves its goals. .
This article has been a guide to what are Outstanding Shares. Here we explain its meaning, types, formula, and where to find them and compare them with issued shares. You may also go through the following recommended articles on basic accounting –