Outstanding Shares: Everything You Need to KnowStartup Law ResourcesVenture Capital, Financing
Outstanding shares is the sum of all shares of a company held by investors including restricted shares owned by company officers and institutional investors. 4 min read
2. What's the Difference Between Outstanding Shares and Authorized Shares?
3. What Are the Differences Between Outstanding Shares, Issued Shares, and Treasury Shares?
4. Why Do Outstanding Shares Matter?
5. Are the Outstanding Shares Equal to the Float?
6. Why Do Outstanding Share Totals Fluctuate?
7. What is the Weighted Average of Outstanding Shares?
8. Legal Advice on Investing
What Are Outstanding Shares?
The term “outstanding shares” (aka “shares outstanding”) refers to the total of all shares of your company’s stock held by all of your investors, including restricted shares owned by company officers and institutional investors.
You will find the total number of outstanding shares listed on your company’s balance sheet under the “Capital Stock Issued and Outstanding” heading. You can also calculate the number of outstanding shares by adding the total number of preferred stock shares to the total number of common stock shares, and then subtracting the total number of treasury shares. Other methods for determining outstanding share totals include looking at the company's market capitalization, earnings per share (EPS), or cash flow per share (CFPS).
Information regarding outstanding shares may also be available on the company’s or local stock exchange’s websites, or through a company’s quarterly filings with the Securities and Exchange Commission (SEC).
What's the Difference Between Outstanding Shares and Authorized Shares?
“Authorized shares” refer to the maximum number of shares that a company can issue as stated in the certificate of incorporation. They are established at the time the company is created and normally number in the millions. Companies can only issue shares and add to the total number of outstanding shares until there are no more authorized shares available, or until shareholders vote to increase (or decrease) the number of authorized shares.
What Are the Differences Between Outstanding Shares, Issued Shares, and Treasury Shares?
“Issued shares” are a company’s authorized shares that are sold to shareholders, including those sold and held by company founders and insiders, institutional investors, and the general public. “Treasury shares” are those shares held by the company. When stocks are first issued, outstanding shares and issued shares are the same thing. When a company buys back shares of its own stock, however, those shares become treasury shares. Treasury shares are not included in a company’s outstanding shares total.
Why Do Outstanding Shares Matter?
The total number of outstanding shares is used to estimate a company’s market capitalization, which is equal to the outstanding shares multiplied by the current share price. Also, earnings per share is calculated by dividing the total outstanding shares by company earnings. Market capitalization and earnings per share are the two of the most significant investor metrics used to determine a company's current market value and overall performance.
Are the Outstanding Shares Equal to the Float?
No. The term “float” refers to the number of a company’s shares available for purchase on the market, typically equal to the total outstanding shares minus the shares restricted for sale by the Securities Exchange Commission (SEC). Restricted shares include those given to company officers as part of their salaries or as part of a benefit package.
Why Do Outstanding Share Totals Fluctuate?
The total number of outstanding shares can change for a number of reasons. Three of the most common reasons for the fluctuation of outstanding share totals are stock splits, share repurchase programs, and the exercise of stock options and warrants.
In a stock split, the number of outstanding shares doubles (in a two-for-one split), resulting in a halving of the stock price. Stock splits are often used to help bring improved liquidity to the company. The counterpart to a stock split is “share consolidation.” For example, a 1-for-2 share consolidation will reduce the number of shares by half, while doubling the the per share stock price.
Share repurchase programs involve turning outstanding shares into treasury shares, thus increasing the market value of the remaining outstanding shares and boosting the earnings per share metric.
Stock options and warrants can also cause the number of outstanding shares to fluctuate. Stock options, for example, are often issued as compensation to employees and others with important connections to the company. Option and warrant holders have the right to purchase stock shares from the company’s treasury. When exercised, options and warrants have the effect of diluting stock value, reducing the treasury stock total, and increasing the float.
What is the Weighted Average of Outstanding Shares?
Clearly, outstanding share totals can vary significantly over time. An accurate reading of the value of a stock’s outstanding share total is critical, however, to calculating a number of essential financial metrics, such as market capitalization and earnings per share. To steady these numbers, financial experts often use what is known as the “weighted average” of outstanding shares in making these calculations. The weighted average incorporates changes in the total number of outstanding shares over a reporting period. Here's an example of how weighted average is derived:
Original (pre-split) outstanding shares x portion of the year at this number during the reporting period + Post-stock split outstanding shares x portion of the year at this number during the reporting period = Weighted average of outstanding shares (OWA)
For example, assuming a company with 200,000 total outstanding shares performs a two-for-one stock split. The company’s new outstanding share total thus becomes 400,000. If the split occurred halfway through the year, the (OWA) for that year would be calculated this way:
200,000 x .5 + 400,000 x .5 = 300,000 OWA
Next, assuming reported earnings by the company of $600,000 for the same year, plugging the above OWA total into the earnings per share (EPS) calculation would result in the following:
Earnings ($600,000) / OWA (300,000 shares) + EPS ($2.00)
Legal Advice on Investing
Before you make any investment decision, it's wise to seek advice from legal and finance professionals. Professional advisors can help you work through all of your complex issues and prevent you from making costly mistakes. The lawyers at UpCounsel's marketplace represent the top five percent of legal professionals and they come from the country's best law schools. You can find advice from lawyers who have 14 years of legal experience offering counsel to Fortune 500 companies. Get the facts first and make the smartest choice with your money.