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Outstanding shares, also known as issued shares or floating shares, mean the total number of company stock owned by shareholders and the public. These outstanding shares are traded actively on the stock exchange and determine ownership interests in a company. Furthermore, these outstanding shares do not include unissued stocks (those that haven’t been allocated to investors yet) or treasury stocks (stocks that have been reacquired by the company). This blog post will cover outstanding shares, their computation, and the effect thereof on stock price, among other things.
Types of Outstanding Shares
The analysis of ownership structure is important for understanding how a firm operates, with outstanding shares playing a key role in this analysis. It includes all holders, including both institutional and individual shareholders. Consequently, these types may be classified into distinct groups, each with unique characteristics and implications for investors. Here are typical types of outstanding shares.
- Common Shares: Commonly referred to as ordinary stock, common shares constitute the majority of publicly traded companies’ outstanding stocks. They enable stakeholders to vote, thus participating in decision-making processes such as electing directors and approving fundamental corporate actions. Notwithstanding common shareholders may receive dividends, but distribution is generally at the discretion of the company subject to profitability performance and management decisions.
- Preferred Shares: Preferred stock represents an independent class with specific preferences as well as privileges accorded by its proprietors. Unlike ordinary equity capital, where voting rights apply, preferred stocks usually lack such privileges. Hence, the holder has no say over management policies within an entity. However, they rank higher than general stakeholders in terms of claims against property or revenue belonging to an organization’s structure. Preferred shareholders mostly earn fixed dividends ahead of distributions made to common ones only before bankruptcy occurs or when it ends up liquidating its assets.
- Treasury Shares: Treasury Stocks, also called re-acquired shares, are previously issued securities that have been bought back by a corporation and thus retained within its own portfolio. Voting powers fall away, and no dividend rights accrue from this group of securities. Share buybacks can achieve treasury shares or as a result of canceling previously issued stocks and later reallocating to employees as additional compensation plans. Treasury stocks can also be sold back into the market if an entity opts to reissue those shares.
- Authorized Shares: Authorized capital refers to the highest number of shares that a company is allowed to issue legally, as stated in its Articles of Incorporation or Corporate Charter. This determines the pool from which a business may solicit interested investors. Notably, it is important to remember that authorized capital does not indicate outstanding stocks’ total count. The organization may raise only part of its authorized capital and retain some stocks unissued through treasury stock holdings. Generally, when there is a need for an increasing number of shares authorized by such charter amendment, shareholders’ approval must be sought.
Crucial Factors in Calculating Outstanding Shares
While this primary calculation may seem simple, several things could make it difficult:
- Stock Splits: A stock split happens when a company increases the number of its outstanding shares by dividing each existing share into many others. For example, a 2-for-1 stock split would increase the number of outstanding shares available. In addition, splits have to be accounted for by adjusting the number of pre-split allocated shares.
- Stock Dividends: It is also known as a scrip dividend. It is the additional shares given to the current shareholders of a company. Usually, companies distribute these extra stocks through stock splits. The outstanding shares after a stock dividend can be calculated by adding the number of additional stocks issued to the existing number of stocks.
- Stock Buybacks: As buybacks, a business may choose to reacquire its shares from either the open market or from its shareholders. On the other hand, these redeemed equities are referred to as treasury shares, and hence they should be deducted from the issued shares in computing outstanding shares.
- Employee Stock Options and Convertible Securities: Employee or investor incentives in the form of granting stock options or issuing convertible securities are popular with most corporate organizations. Upon exercising such alternatives or converting securities into ordinary shares, outstanding share capital rises. Consequently, for purposes of accounting, in line with this circumstance, it becomes necessary that we add onto the already existing figure of shares all those that were allocated during exercise/conversion.
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How to Calculate Outstanding Shares
This means that the total volume of outstanding equity issued by a firm can determine largely how much one would pay for their stake at any given time on NYSE Amex Equities. Generally speaking, investors' ownership interest gets diluted when there are more common stocks sold out or new ones are made available, thereby implying that such dilution could suppress earnings per share (EPS) besides lowering the stock price. Conversely, through decreasing outstanding shares, for example, by buying back and canceling some units, EPS will rise, usually leading to an increase in stock prices due to such positive factors as improving profits and changes in a wide range of financial ratios applied in valuing businesses which have undergone transformation possibly including merging with similar firms, etc. To find out whether there has been dilution through new issues, investors watch closely any alterations seen pertaining to this contextual comparison relating directly between before/after totals obtained upon redistribution, majorly targeting them.
Also, how outstanding shares are computed depends on the type of stock issued by a company. These two types of stock include:
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Common Stock:
This is an equity shareholding in a corporation that comes with voting rights. To get common stocks’ outstanding shares, subtract treasury stocks from total issued stocks. The resulting number shows the amount of shares that belong to shareholders and can be traded on the open market.
Outstanding Shares of Common Stock = Total Issued Shares - Treasury Shares
- Preferred Stock: This has dividend preference over other kinds of stock but does not carry any voting rights. The calculation differs for each variety; while working out the outstanding shares for preferred stockholders, it is necessary to consider alternative securities, such as convertible options that might eventually turn into ordinary ones if called upon by circumstances. Should this happen, then obviously the number of outstanding shares spikes accordingly.
Key Terms for Outstanding Shares
- Outstanding Shares: This refers to all the company's shares held by its shareholders except those held by the company itself.
- Shareholder: A person or organization who owns one or more shares in a company and has full legal rights, including equal treatment at general meetings and access to information about major decisions affecting the company’s future.
- Common Stock: It is an ownership interest in a business entity that offers individuals voting privileges and possibly other rights like receiving dividends, capital gains, etcetera after some specific period elapses before they can dispose of their stake through whichever means are legally permitted under present laws enacted thereat.
- Preferred Stock: Refers to stocks granted certain special benefits beyond those available to common shareholders, such as getting paid first when dividends are distributed among different classes represented within the equity base at the time liquidation takes place because bankers rank as creditors with priority claim whatever remains after satisfying claims secured by receivership orders firm does go bankrupt thus making future prospects unlikely hereafter. In some cases, these preferences may include receiving payments before any other type of security holder or even having rights over company assets in the event it goes into liquidation.
- Treasury Stock: Refers to the equity that was once given by a firm to its stockholders and then later bought back by the same company, as a result of which outstanding shares decreased.
- Authorized Shares: The maximum number of shares that a company can legally issue as stated in their articles of incorporation.
- Dilution: It involves lowering the percentage ownership held by original (pre-existing) investors because extra equity units are introduced into the market.
- Voting Rights: These are the rights given to you for being a shareholder, such as voting on major corporate decision-making processes based on your stake size vis-à-vis others who share a common ownership structure.
- Stock Split: It’s one way that enables a business to raise its overall outstanding shares and lower share prices in proportion. It is frequently performed to make stocks more affordable or increase liquidity.
- Earnings per Share (EPS): This is a monetary calculation that measures how much money an organization makes divided by the amount of shares it has outstanding, showing how profitable each share is.
Final Thoughts on Outstanding Shares
For investors to measure the market value, governance system, and voting rights of companies, it is important to comprehend what outstanding shares mean. Again these numbers can be used for thoughtfully and well-calculated decisions, including coming up with different financial ratios that can be used in evaluating any company's performance. Even this depicts monitoring changes that take place in outstanding share numbers as reflected by stock prices. Finally, an overall understanding of outstanding shares helps effectively navigate through investment terrain, consequently thereby maximizing returns while minimizing the risks involved.
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ContractsCounsel is not a law firm, and this post should not be considered and does not contain legal advice. To ensure the information and advice in this post are correct, sufficient, and appropriate for your situation, please consult a licensed attorney. Also, using or accessing ContractsCounsel's site does not create an attorney-client relationship between you and ContractsCounsel.
