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Outstanding Shares: Definition, How it Works, Calculations          

Outstanding Shares: Definition, How it Works, Calculations, and Types

Outstanding Shares: Definition, How it Works, Calculations, and Types

Outstanding shares refer to the total number of company stocks currently issued and held by its stockholders. Outstanding shares assist stakeholders in understanding market capitalization and liquidity by indicating that more liquid stocks have lower risk and lower possible returns, while less liquid stocks have higher risk and higher possible returns, which will help in better investment decisions. The company’s outstanding shares remain in circulation, as the company has neither repurchased, retired, nor removed them from the market.

Investors and analysts use outstanding shares to calculate financial ratios such as earnings per share (EPS) and price-to-earnings (P/E). Outstanding shares estimate other financial metrics, such as book value per share. Book value per share is the minimum number of shares owned in a company and is used to forecast the possible market price of a share at a specific time.

There are two categories of outstanding shares, common and preferred shares. The most basic type of stock that a company can issue is common shares. They allow shareholders to vote on company decisions and collect dividends if declared but are the last to receive the assets in the event of bankruptcy.

Preferred shares take priority over common shares, in terms of asset distributions in the event of bankruptcy.

What are outstanding shares?

Outstanding shares are the total quantity of shares of a company’s stock issued and owned by institutional investors, individual investors, and insiders. “Shares outstanding” is another term for outstanding shares. 

A company issues outstanding shares when it decides to raise funds by selling ownership in the company to investors. The company either issues new shares in an initial public offering (IPO) or sells additional shares in a secondary offering. The company’s board of directors normally controls the issuing and management of outstanding shares, subject to the appropriate securities authorities’ regulations and reporting obligations.

The number of outstanding shares can change over time due to 6 main factors. The six main factors are stock issuances, stock buybacks, stock splits, stock dividends, conversion of securities, and Mergers and Acquisitions.

How does Outstanding Shares work?

Outstanding shares work in the same manner that when a company decides to issue stock, it produces new shares that investors can buy and sell. These shares are sold in an initial public offering (IPO) or later secondary offers. The shares become outstanding and can be traded on the open market when sold.

The number of outstanding shares might change as investors buy and sell these shares. The number of outstanding shares will fall if a company buys back part of its outstanding shares. Issuing new shares of stock will increase the number of outstanding shares. 

The importance of outstanding shares stems from their ability to give information about a company’s financial situation and potential. Investors and analysts use outstanding shares as important statistics to evaluate a company’s performance and value. Ratios, such as earnings per share (EPS), the price-to-earnings ratio (P/E), and earnings before interest, taxes, depreciation, and amortization (EBITDA), assist investors in evaluating a company’s profitability, growth potential, and market value.

The ownership of outstanding shares spreads among several shareholders, with no single shareholder controlling the company. However, some shareholders own a considerable portion of the outstanding shares and hence have more control over the company’s decisions and outcomes.

The number of outstanding shares impacts a company’s ability to generate capital through future stock issuances, as well as its liquidity and ability to buy back shares.

Understanding how outstanding shares work is critical for investors to make informed stock purchase or sale choices and for companies to regulate their capital structure and attract investment.

What is Outstanding Shares Formula?

To calculate the outstanding shares, you use the following formula.

Outstanding Shares = Total Shares Issued – Treasury Shares

Total shares issued refers to the total number of shares issued by the company. The company repurchases shares of its stock and holds them in its treasury as treasury shares. We can calculate the number of outstanding shares held by shareholders by subtracting the treasury shares from the total number of shares issued.

How to Calculate the Outstanding Shares of a Company?

You can calculate the outstanding shares using two numbers – the total number of shares issued by the company and treasury shares held by the company’s investors. After you have the total shares issued and treasury shares, you can use the formula to compute the number of outstanding shares.

Outstanding Shares = Total Shares Issued – Treasury Shares.

Let’s say that a company has authorized 10,000 shares of stock, and it has sold 8,000 of these shares to investors. The company also holds back 1,000 shares in its treasury.

Using the formula, we can calculate the outstanding shares as:

Outstanding Shares = Total Shares Issued – Treasury Shares

Outstanding Shares = 8,000 – 1,000

Outstanding Shares = 7,000

How to find the Total Number of Outstanding Shares of the Company?

You can find the total number of outstanding shares of a company by checking the company’s financial statements, which are easily accessible on the company’s website. You have to look at the company’s financial statements to find the total number of shares issued, and then you have to subtract any shares held as treasury shares from the total number of shares issued to get the total number of outstanding shares.

What are the different Types of Shares a Company can Issue?

A company can issue seven different types of shares, depending on its specific needs and aims. The seven types of shares are as follows.

Preferred Shares

Preferred shares are a kind of share that entitles the bearer to preferential treatment regarding dividends and other payouts, such as call provisions, which allow the company to redeem the shares of the preferred shareholders at a certain price after a specific date. The company must make a predetermined dividend payment to preferred shareholders before distributing dividends to common shareholders. They cannot vote in most cases; however, there are exceptions in certain situations.

Pros

  1. Preferred shares often pay a fixed dividend, making them a more reliable source of income than ordinary shares.
  2. A company often pays preferred shareholders before ordinary shareholders when it faces financial difficulties and needs to reduce dividend payments.
  3. Preferred shares are less unstable than ordinary shares, as they have a fixed dividend payment paid out before any dividend is paid to common shareholders.
  4. Preferred shares gain value over time, giving investors the potential for capital appreciation.

Cons

  1. Preferred shareholders often do not have the same voting rights as ordinary shareholders.
  2. Companies can call their preferred shares, which means they can repurchase them from investors at a predetermined price.

Preferred shares can be a smart investment for those searching for a consistent income source and are ready to accept lower potential profits in exchange for lower volatility. They are not appropriate for investors seeking strong growth potential or a say in company decisions.

Ordinary Shares

Ordinary shares (common shares) are the most basic type of stock that a company can issue. Ordinary shares symbolize ownership in the company and allow the shareholder to vote on company matters, like the election of directors and significant company decisions. They also give the opportunity to the shareholders to receive dividends from the company’s profits if it decides to pay them.

Pros

  1. Ordinary shareholders can vote on company matters.
  2. Ordinary shares increase in value over time as the company grows and becomes more profitable.
  3. Companies choose to pay dividends to their common stockholders.
  4. Ordinary shares are often highly liquid, meaning they are easily purchased and sold on a stock exchange.

Cons

  1. Ordinary shareholders do not receive a guaranteed dividend payment, unlike fixed-income securities such as bonds.
  2. The value of the existing shares can decrease when a company gives out more ordinary shares.
  3. Companies can raise capital by issuing more ordinary shares, which can dilute the value of existing shares and lead to lower returns for investors.

Ordinary shares can be an attractive option for investors seeking long-term growth and ready to bear the risks involved with stock market investing.

Redeemable Shares

Redeemable shares are a type of share that can be bought back or redeemed by the issuing company at a later date. Redeemable shares give an option to the company to repurchase its own stock if it needs to reduce the number of outstanding shares or change its capital structure.

Pros

  1. Dividends paid on redeemable shares can provide a steady source of income for income-seeking investors.
  2. Redeemable shares give investors flexibility because they can be sold back to the company at a predetermined price, allowing them to leave the investment easily.
  3. Redeemable shares are less risky than ordinary shares since investors can redeem their shares at a predetermined price, protecting their capital in the event of poor market conditions.

Cons

  1. Redeemable shares do not include voting rights, so investors have no role in company matters.
  2. A company may redeem its shares at a lower price than the original purchase price, which results in investors losing some of their capital.

Redeemable shares are ideal for individuals seeking a lower-risk, fixed-income investment. Investors should be aware of the restricted potential for capital appreciation and the possibility of a price discount when the shares are redeemed.

Alphabet Shares

An alphabet share is a different class of common stock associated with a particular subsidiary of a company. Alphabet shares provide entitlement different from the rules for ordinary shares, such as preferential dividends or limited voting rights at general meetings. Still, their primary purpose is to allow payment for a specific share class without being compelled to distribute the same dividend to each shareholder.

Pros

  1. Alphabet shares enable investors to select the share class that best meets their investment objectives and preferences.
  2. Alphabet has classes of shares, like Class A and B, that provide a stable source of income for investors, which will be attractive to income-seeking investors.
  3. Alphabet shares provide higher returns to investors since the founders or management are frequently more inclined to grow the company.
  4. The management has control, which reduces the likelihood of abrupt changes in the company’s direction or management.

Cons

  1. The value of existing shares gets diluted when a company issues new shares, which may be unfavorable to existing shareholders.
  2. The classes of shares can be perplexing for investors, which makes it difficult to understand the differences between each class.
  3. Alphabet shares may give investors less transparency because the management may have greater control over the published information.

Investors investing in Alphabet shares should carefully assess the features of each class of share and consider their personal investment goals and risk tolerance before making an investment decision.

Deferred Shares

Deferred shares (founder shares) are usually given to important people within the issuing company. Deferred shares usually gives them less power to vote and a lower priority for dividend payments than common shares or preferred shares. Companies usually issue deferred shares to raise funds without diluting the ownership or control of current shareholders.

Pros

  1. Deferred shares are a good option for investors who are concerned about the dilution of their shares or the impact of new share issuances on the company’s existing capital structure, as these have a very low risk of dilution.
  2. Deferred shares are often kept for a longer period, making them a viable option for investors seeking a more stable, long-term investment opportunity.
  3. Deferred shares provide higher returns to investors because of the company’s potential for long-term growth and success.

Cons

  1. Deferred shares’ limited or no voting rights might disadvantage investors who desire to have a say in the company.
  2. Deferred shares have associated restrictions and requirements, which can cause investors to be uncertain about the future value and profitability of the shares.

Deferred shares benefit investors, particularly in terms of higher potential returns and lower risk of dilution. Investors should carefully evaluate the potential disadvantages of deferred shares, such as restricted control and uncertainty when making an investment decision.

Management Shares

Management shares are owned by a company’s top managers or management team. Management shares may be subject to limitations or conditions, such as vesting periods or trading prohibitions.

Pros

  1. Investors gain access to the knowledge and expertise of company insiders, providing a greater understanding of the company’s operation and prospects.
  2. Management shares give stability and continuity for an investor, as the founders and executives are more dedicated to the company’s long-term success.
  3. Management shares provide higher returns to investors due to the possibility of insider information and the company’s long-term growth and performance.

Cons

  1. The management team may drive the decision-making process that serves their interests rather than those of other shareholders if they own a significant proportion of the company’s stock.
  2. The company will become more sensitive to market changes or other dangers, leading to risk concentration if management owns a significant portion of the company’s stock.

Management shares can provide certain advantages for investors, particularly regarding interest alignment, expertise, experience, and stability. On the other hand, investors should also carefully evaluate the potential disadvantages of management shares, such as conflicts of interest and a lack of responsibility.

Non-Voting Shares

Non-voting shares are types of shares that do not have voting rights. Companies issue non-voting shares to raise finance while preserving voting power in a small group of shareholders, usually the founders or management team. Companies often issue these shares in addition to their voting shares.

Pros

  1. Non-voting shares enable founders and insiders to raise funds while maintaining influence over company decision-making.
  2. Companies can trade non-voting shares for less than voting shares, enabling them to raise capital without reducing current shareholders’ voting power.
  3. Non-voting shares allow investors to diversify their portfolios by investing in a company without suffering the risks associated with voting rights.
  4. Non-voting shares are more liquid than voting stock since it is more commonly traded and easier to sell.

Cons

  1. Non-voting shares may be used to entrench management and insiders, making it harder to hold them accountable for bad performance or misconduct.
  2. Non-voting shareholders have little influence over company choices, which can be a concern for people who wish to guarantee that the company runs ethically and responsibly.
  3. Shareholders have limited access to company information because they cannot attend shareholder meetings or vote on motions.

Non-voting shares are bought by investors who want a fixed income or preferential dividend distribution over common shareholders. Non-voting shares are also less volatile than common shares since they are less affected by market fluctuations or changes in the company’s performance

Non-voting shares, also known as preferred shares, typically offer a fixed dividend payout and no voting rights in company matters. For example, Berkshire Hathaway’s Class B shares are non-voting and offer lower voting rights than their Class A shares.

What type of Shares are Outstanding Shares?

Outstanding shares can refer to both types of shares, common and preferred, as they don’t represent a specific type of share but rather the total number of shares held by investors. They stand for the ownership stake in the company offered for sale on the public market and can be bought and sold at any time.

What is Basic Outstanding and Diluted shares?

Basic outstanding shares and diluted outstanding shares are two methods for calculating a company’s total number of outstanding shares.

Basic outstanding shares refer to the total number of issued and outstanding shares of a company’s equity. This consists of all common stock and any converted preferred shares.

Diluted shares reflect the possible dilution of a company’s shares due to the availability of stock options, warrants, convertible bonds, and other convertible securities. The calculation of diluted shares can affect earnings per share (EPS), a crucial financial indicator used to evaluate a company’s profitability. A company issuing a significant number of potential shares through the conversion of securities will result in its diluted EPS being lower than its basic EPS.

What is Authorized Shares?

Authorized shares, sometimes referred to as authorized capital or approved stock, are the maximum number of shares of stock that a company’s charter or articles of incorporation permit it to issue.

The company determines the maximum number of shares it can issue, when creating a company. This amount is known as the authorized capitalization of shares. The board of directors or shareholder vote may increase the number of authorized shares.

There is a relationship between authorized and outstanding shares, although they represent different characteristics of a company’s stock. The number of outstanding shares can never surpass the maximum number of authorized shares. A company cannot issue further shares without modifying its articles of formation if it reaches its approved share limit.

Investors can distinguish between authorized shares, which indicate the maximum number of shares a company can issue, and outstanding shares, which represent the number of shares the investors currently hold.

How does Outstanding Shares determines Market Capitalization of a company?

Outstanding shares are a significant aspect of calculating the market capitalization of a company. Market capitalization, or market cap, is calculated by multiplying the number of outstanding shares by the share’s current market price.

A company’s market capitalization will increase proportionally to the number of outstanding shares if the market price per share remains constant. The market capitalization will also fall if the market price per share remains constant and the number of outstanding shares declines.

What is the Outstanding Shares Weighted Average?

The weighted average of outstanding shares is a method employed to calculate the average number of shares outstanding within a certain period. This calculation is frequently employed in financial analysis to determine various financial ratios, like earnings per share (EPS) and price-to-earnings (P/E) ratio. You must follow these five steps to determine the Outstanding Shares Weighted Average.

  1. Calculate the total number of outstanding shares for each period. The company includes this information in its financial statements and annual report.
  2. Determine the weighted portion of the period for which the outstanding shares were present. 
  3. Multiply the outstanding share count for each time by their respective weighted proportions.
  4. Sum the multiplication results for all of the periods.
  5. Divide the amount by the sum of the weighted sections to obtain the weighted average of outstanding shares.

The weighted average number of outstanding shares is sometimes used instead of the actual number since it provides a more realistic picture of the company’s performance over time. This calculation takes any variations in the number of shares outstanding during the period.

What are Shares Outstanding in Financial Metrics?

Outstanding share is a financial metric that indicates the total number of shares of a company’s stock held by its shareholders, comprising institutional investors, insiders, and the general public.

To determine the outstanding shares, you must deduct the number of repurchased or retired shares from the total number of shares issued by the company. This is computable using the formula.

Shares Outstanding = Issued Shares – Treasury Shares

The resulting number shows the total number of shares held by all market participants. It is a crucial indicator for evaluating the market capitalization of the company and the possible influence of changes in the share price on the company’s overall value.

How Outstanding Shares are impacted by Stock Buybacks and issuances?

Stock repurchases (stock buybacks) occur when a company purchases its shares from the market. This lowers the number of outstanding shares as the company purchases a portion of its stock. The remaining shares increase in value because the same earnings are now distributed among fewer shares when a company repurchases its shares from the market.

On the other hand, stock issuance occurs when a company issues more shares to the market, which increases the number of outstanding shares. This can occur when a company needs to generate funds via a public offering or private placement. The existing shares become less valuable since the same earnings are divided among more shares when the number of outstanding shares increases.

Why does a company need to report the Total Number of Outstanding Shares?

A company must disclose the total number of outstanding shares since it is an essential statistic for investors and analysts to evaluate the performance and financial health of the company. By disclosing the number of outstanding shares, a company gives investors transparency and enables them to make educated decisions. In addition, it assists management in understanding the company’s performance and making strategic decisions on future stock issuances or buybacks.

Can you find the Total Number of Outstanding Shares of a Company in SEC?

Yes, the number of outstanding shares of a company can be found in SEC (Securities and Exchange Commission) filings such as 10-K annual reports and 10-Q quarterly reports. The equity part of the balance sheet reports the overall number of outstanding shares. Information is also available in the footnotes to the financial statements and the management’s discussion and analysis (MD&A) part of the filings.

What is the difference between Outstanding Shares and Treasury Shares?

Outstanding and treasury shares are two distinct terms relating to a company’s equity. Outstanding shares refer to the total number of shares issued and currently held by shareholders. The general public and institutional investors hold these shares.

On the other hand, Treasury Shares are repurchased by the company and retained in its own treasury. The company has canceled these shares, and shareholders do not hold them. Treasury Shares represent the company’s ownership of its stock, while outstanding shares represent the ownership interest of shareholders.

Companies can utilize treasury shares for 3 main purposes, including employee stock options, stock-based pay, and share repurchases. When a company purchases its own stock, it lowers the number of outstanding shares, enhancing earnings per share and the stock price.

What is the difference between Outstanding Shares and Issued Shares?

The primary distinction between issued and outstanding shares is that issued shares comprise both outstanding and treasury shares, whereas outstanding shares solely include shareholder-owned shares.

A company considers the total amount of shares it has authorized to issue and has issued to shareholders, including both outstanding and treasury shares, as issued shares. Companies include authorized but unissued shares that have not yet been offered to investors in the number of issued shares.

On the other hand, outstanding shares refer to the total number of issued and owned shares of a company, excluding treasury shares. These shares indicate the stockholders’ ownership interest in the company.

What is the difference between Outstanding Shares and Float Stock?

The primary difference between outstanding and float stock is that outstanding shares include all issued shares of a company’s stock, whereas float stock only comprises publicly traded shares. Investors often use float stock to assess a company’s liquidity and the ease its shares trade on the market.

Outstanding shares and float stock are both key indicators used to evaluate a company’s stock, but they represent distinct aspects of the company’s ownership structure.

Outstanding shares refer to the entire number of issued and owned shares of a company’s stock by investors, including institutional investors, insiders, and retail investors. Insiders hold restricted shares not available for public trading, and openly traded shares make up outstanding shares.

On the other hand, float stock refers to the quantity of publicly-tradable shares of a company’s stock. To determine the floating stock, one deducts the restricted shares, such as those held by company insiders or the company itself, from the total number of outstanding shares.

Arjun
Arjun Remesh

Head of Content

Arjun is a seasoned stock market content expert with over 7 years of experience in stock market, technical & fundamental analysis. Since 2020, he has been a key contributor to Strike platform. Arjun is an active stock market investor with his in-depth stock market analysis knowledge. Arjun is also an certified stock market researcher from Indiacharts, mentored by Rohit Srivastava.

Shivam
Shivam Gaba

Reviewer of Content

Shivam is a stock market content expert with CFTe certification. He is been trading from last 8 years in indian stock market. He has a vast knowledge in technical analysis, financial market education, product management, risk assessment, derivatives trading & market Research. He won Zerodha 60-Day Challenge thrice in a row. He is being mentored by Rohit Srivastava, Indiacharts.

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