Outstanding shares, also termed floating or issued shares, refer to the total number of shares of a company’s stock held by shareholders and the public. These outstanding shares are actively sold in the stock market and define the ownership interest in the business. In addition, these outstanding shares exclude unissued shares (shares not allocated to investors yet) or treasury shares (shares repurchased by the company). This blog post will discuss outstanding shares, their calculation, their impact on stock price, and more.
Types of Outstanding Shares
Ownership structure analysis is a crucial aspect of comprehending a company's framework, with outstanding shares playing a central role in this evaluation. Outstanding shares encompass the total count of shares held by shareholders, including institutional and individual investors. These shares can be categorized into different types, each possessing distinct characteristics and implications for investors. Below are the common types of outstanding shares.
- Common Shares: Referred to as ordinary shares, common shares constitute the majority of outstanding shares in publicly traded companies. They grant shareholders voting rights, enabling participation in corporate decision-making processes such as electing the board of directors and approving fundamental corporate actions. While common shareholders may receive dividends, the allocation of these payments is generally at the company's discretion, subject to profitability and management decisions.
- Preferred Shares: Preferred shares form a separate class that grants specific preferences and privileges to their owners. Unlike common shares, preferred shares typically lack voting rights, meaning holders do not influence corporate governance. However, they possess a higher stake in the organizational assets and earnings than general shareholders. Preferred shareholders usually receive fixed dividends before any distribution to common shareholders. In cases of liquidation or bankruptcy, preferred shareholders prioritize receiving their share of the remaining company assets.
- Treasury Shares: Also known as reacquired shares, treasury shares are previously issued shares that a company has repurchased and now holds in its treasury. These shares no longer confer voting rights or entitle holders to dividends. Treasury shares may be obtained through various methods, including share buybacks or canceling previously issued shares. Companies often repurchase their shares to demonstrate confidence in their financial position or for employee stock-based compensation plans. If preferred, treasury shares can be reallocated later if the organization opts to sell them back into the market.
- Authorized Shares: Authorized shares define the maximum quantity of shares a business is lawfully authorized to issue, as stipulated in its corporate charter or articles of incorporation. This number states the potential pool of shares the company can offer investors. It is important to note that authorized shares do not reflect the actual count of outstanding shares. A company may issue only a portion of its authorized shares and retain the remaining shares as unissued or in its treasury. In the event of a desire to increase the authorized share count, shareholder approval is typically required.
Crucial Factors in Calculating Outstanding Shares
While the primary calculation seems easy, several aspects can complicate the estimation of outstanding shares:
- Stock Splits: A stock split is when an organization increases the number of outstanding shares by dividing each existing share into numerous shares. For instance, a 2-for-1 stock division would increase the amount of outstanding shares. Furthermore, the number of shares allocated before the division must be adjusted to document stock splits.
- Stock Dividends: Stock dividends are supplementary shares allocated by a business to its current shareholders. As stock splits, stock dividends usually increase the company’s outstanding shares. To calculate outstanding shares after a stock dividend, the number of additional shares distributed needs to be added to the existing number of shares.
- Stock Buybacks: A company may repurchase its shares from the open market or shareholders. These repurchased shares are considered treasury shares and must be subtracted from the issued shares to calculate outstanding shares.
- Employee Stock Options and Convertible Securities: Companies often grant stock options or issue convertible securities to employees or investors. When these alternatives are exercised, or securities are converted into standard shares, the number of outstanding shares rises. To account for this, the number of shares allocated upon the exercise or conversion must be added to the existing number of shares.
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How to Calculate Outstanding Shares
The number of outstanding shares can considerably affect a business's stock cost. Generally, an increase in the number of outstanding shares through stock offerings or allocation of new shares dilutes the current shareholders' ownership stake. This dilution can reduce earnings per share (EPS) and impact the stock cost negatively. On the contrary, a decrease in outstanding shares, such as via share buybacks, can boost earnings per share and possibly increase the stock cost. Investors closely evaluate changes in outstanding shares to consider possible dilution effects on their investment.
In addition, the calculation of outstanding shares depends on the type of stock a company has issued. Generally, two types of stock exist, such as
-
Common Stock:
It represents equity ownership and carries voting rights. To calculate outstanding shares of common stock, you need to subtract the treasury shares from the total issued shares. The result represents the number of shares held by shareholders and available for trading in the market.
Outstanding Shares of Common Stock = Total Issued Shares - Treasury Shares
- Preferred Stock: It usually grants priority in dividends but lacks voting rights. The outstanding shares calculation is different for each type. Determining the outstanding shares of a preferred stock involves considering any convertible securities or options that may be converted into common shares. If any such conversion occurs, the number of outstanding shares increases accordingly.
Key Terms for Outstanding Shares
- Outstanding Shares: The total count of shares released by a company and owned by its shareholders, excluding any shares held by the company itself.
- Shareholder: An individual or entity that possesses shares in a company and holds the rights and entitlements associated with ownership.
- Common Stock: Regular shares that represent ownership in a company, typically granting voting rights and potential dividends.
- Preferred Stock: Shares that hold certain advantages over common stock, such as priority in receiving dividend payments and claim to assets during liquidation.
- Treasury Stock: Shares repurchased by a company from shareholders and held in its possession, resulting in a decrease in the number of outstanding shares.
- Authorized Shares: The maximum quantity of shares an organization is legally authorized to issue, as specified in its corporate charter.
- Dilution: It refers to the reduction in the ownership percentage of existing shareholders caused by the issuance of additional shares.
- Voting Rights: The ownership given to shareholders to participate and vote in enterprise decisions, usually proportionate to the number of shares they possess.
- Stock Split: A corporate action that increases the total number of outstanding shares while proportionally decreasing the share price, often carried out to make shares more affordable or improve liquidity.
- Earnings per Share (EPS): It is a monetary calculation that estimates an organization's total profit divided by the number of outstanding shares, demonstrating profitability on a per-share basis.
Final Thoughts on Outstanding Shares
Understanding outstanding shares is necessary for investors to assess a business's market worth, ownership system, and voting authority. Moreover, investors can make well-thought decisions by considering outstanding shares and examining diverse financial ratios to evaluate a company's performance. Additionally, the impact of outstanding shares on stock prices highlights the importance of monitoring changes in the number of shares outstanding. Also, to effectively navigate the investment domain, gaining a comprehensive understanding of outstanding shares is crucial in maximizing investment returns and minimizing risks.
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