What are the Outstanding Shares?

A company also often keeps a portion of its outstanding shares of stock in its treasury, from both initial stock issue and 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 Authorized (issued shares) 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.

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  • 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.
  • read more.

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 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.

Two Types of Shares Outstanding

  • Basic ShareDiluted 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.read more

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 Shares Outstanding 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.read more 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. read more (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 treasury shares amount.

How Shares outstanding 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.read more 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. read more.

  • 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.read more 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 = $564,264EPS 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).read more.

Conclusion

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.read more, institutional investors, and insiders. However, stocks outstanding does not include treasury stock.

Video on Outstanding Shares

This article has been a guide to Shares Outstanding, meaning, definition, formula, and types. Here we also discuss top outstanding shares vs. authorized shares, practical examples, and why an investor should care about outstanding stocks. You may also go through the following recommended articles on basic accounting –

  • Issued vs Outstanding SharesCalculate Days Payable OutstandingShares Vesting ExamplesFormula for Common Stock