Outstanding Shares

Refers to the number of a company’s shares available on the secondary market

Author: Josh Pupkin
Josh Pupkin
Josh Pupkin
Private Equity | Investment Banking

Josh has extensive experience private equity, business development, and investment banking. Josh started his career working as an investment banking analyst for Barclays before transitioning to a private equity role Neuberger Berman. Currently, Josh is an Associate in the Strategic Finance Group of Accordion Partners, a management consulting firm which advises on, executes, and implements value creation initiatives and 100 day plans for Private Equity-backed companies and their financial sponsors.

Josh graduated Magna Cum Laude from the University of Maryland, College Park with a Bachelor of Science in Finance and is currently an MBA candidate at Duke University Fuqua School of Business with a concentration in Corporate Strategy.

Reviewed By: Austin Anderson
Austin Anderson
Austin Anderson
Consulting | Data Analysis

Austin has been working with Ernst & Young for over four years, starting as a senior consultant before being promoted to a manager. At EY, he focuses on strategy, process and operations improvement, and business transformation consulting services focused on health provider, payer, and public health organizations. Austin specializes in the health industry but supports clients across multiple industries.

Austin has a Bachelor of Science in Engineering and a Masters of Business Administration in Strategy, Management and Organization, both from the University of Michigan.

Last Updated:January 25, 2024

What are Outstanding Shares?

Outstanding shares are the number of a company's shares available on the secondary market. This means that the shares are available to be purchased by investors. 

These shares are any authorized shares, excluding treasury stock, held or sold to a corporation's shareholders.

The number of outstanding shares of a company can be found on a company's most recent quarterly or annual with the SEC, typically listed on a company's balance sheet under the category of "Capital Stock." 

It is required that companies report their outstanding shares to the SEC. However, since there are fluctuations in share counts between different reporting periods, many companies use a weighted average to express the figure. 

These shares are included in calculating important business metrics, such as market capitalization (the number of shares outstanding * current share price) and earnings per share (net income after dividend payments/shares outstanding). 

Key Takeaways
  • Outstanding shares represent the shares of a company available on the secondary market for investors to purchase, excluding treasury stock.
  • For investors, understanding a company's outstanding shares is essential when making investment decisions.
  • This information is publicly available through SEC filings, company balance sheets, and investor relations webpages.
  • Companies use stock splits or consolidations to manage outstanding shares, impacting liquidity and stock attractiveness.
  • Floating stock, representing the shares available for public trading, is vital for investors to gauge a company's potential future actions, ownership structure, and susceptibility to price volatility.

Understanding Outstanding Shares

As an investor, finding out a company's number of outstanding shares could be a key piece of information when considering investing in the company. For this reason, the SEC requires all public companies to report their outstanding shares in their filings to the SEC, which is public information. 

As mentioned above, you can find this figure on the company's balance sheet under the category of "Capital Stock." In addition, this is listed in the shareholder's equity section of the balance sheet, along with total authorized stock and total floating shares. 

These balance sheets are found within a firm's quarterly and annual reports. In addition, the figure is also listed in the capital section of a firm's annual report (the Form 10-K filing).

There are still some places where you can find this information, other than the SEC's website. For example, you can usually find the number of shares outstanding on investor relations webpages, which are only available for publicly listed companies or on stock exchanges. 

If these resources aren't enough, you can even calculate the number of shares outstanding by yourself!

The formula is:

Market Capitalization / Current Share Price = Number of Shares Outstanding

Whatever method you use to gather this information will always be readily available online or easy to calculate, allowing for better investment decisions. 

Stock splits and share consolidation

A company can increase its number of outstanding shares through stock splits. They can also reduce outstanding shares by undertaking reverse stock splits known as share consolidations. 

Stock splits are generally undertaken to make the share price of the firm fall within the range of what retail investors are willing to pay. 

Since the number of outstanding shares is increasing, the liquidity of the stock increase too. However, although the total number of such shares is increasing, the total dollar value of these shares remains constant because a stock split doesn't change the value of a company. 

The price of each share will decrease, leading to the company's stock becoming more affordable.

The most common ratios used for stock splits are 2-for-1 and 3-for-1. This means that every share investors held before the split will now have double or triple the number of shares. 

A reverse stock split, also known as a share consolidation, is used to make the share price rise into the minimum range necessary to meet an exchange's listing requirements.

Lowering the number of these shares may inhibit liquidity, but it may also deter short sellers from the stock because of the difficulty of borrowing the shares. 

Since a company is lowering the number of shares outstanding when performing a share consolidation, the price of each share should rise in value. 

Companies may do this to appear as though their company is worth more than it is to people who don't have the necessary information or education to make an informed opinion. 

Blue Chip Stocks

Blue chip stocks are stocks that come from well-known companies. Blue-chip stocks have a strong reputation for performing well and paying dividends. 

You will have heard of these industry giants and probably frequently deal with them. An example of a blue-chip company is Coca-Cola Co.

Most blue-chip stocks have an increased number of these shares due to multiple shares splits over their long operational history. As a result, they account for a steady increase in the global market capitalization and growth in investors' portfolios. 

This by no means implies that increasing the number of these shares leads to guaranteed success. First, the company has to do its job and have strong, consistent financial performance, delivering constant earnings growth.

These shares may indicate a stock's liquidity, but the liquidity is more dependent on its share float.

For example, a company has 50 million shares outstanding, but 48 million of these shares are tied to insiders and institutions. This leaves only 2 million shares for the public, meaning that the float of only two million shares may restrict the stock's liquidity. 

Weighted Average of Shares Outstanding

The number of such shares will often change. This is due to a multitude of factors, like the firm issuing new shares, repurchasing shares, or retiring shares that already exist. 

Also, the figure will change when other financial instruments, like employee stock options, are converted into shares. 

So to adjust for this issue, we can use the weighted average of shares outstanding. The calculation for this figure incorporates any changes in the total number of a firm's outstanding shares during a reporting period. 

The reporting period usually parallels the date the company submits quarterly and annual reports. 

The weighted average can calculate significant financial metrics more accurately, like earnings per share for a specific period. Earnings per share is an important metric used to measure how much net profit the firm earns for each share of its stock. 

Using the weighted average method to calculate outstanding shares is consistently accurate, even when the amount of shares changes over time. 

The formula for calculating looks like this:

Number of shares outstanding * the % of the reporting period for which the number of shares covers = weighted average of shares outstanding

The weighted average method doesn't consider shares that can be potentially created through various mechanisms. As a result, the weighted average of outstanding shares will not tell you the diluted earnings per share.

Shares Outstanding Vs. Treasury Shares

A common misconception is that people often think that these shares and treasury shares are the same. This is incorrect. Treasury shares are shares held by the company and cannot be sold on the open market

Essentially, treasury shares are the portion of the shares that a firm keeps in its treasury. These shares come from a share repurchase program, where the firm buys back shares from the public, or these are shares that were never issued to the public in the first place. 

Using treasury shares and shares outstanding, you can calculate the total number of issued shares of a company:

Treasury shares + Shares outstanding = Total number of issued shares 

A reason why they are commonly mixed up is that treasury shares can come from outstanding shares. 

As mentioned above, a company can acquire treasury shares through a share repurchase program. The company would be buying back outstanding shares to put in its treasury. 

Share Repurchase Programs

There are times when a company considers its stock to be undervalued. As a result, the company may initiate a repurchase program to buy back some of its stock. 

The company does this to reduce the number of outstanding shares, hopefully leading to an increase in the market value of the remaining shares due to the lower supply and larger earnings per share ratio.

Another reason a company might want to repurchase shares is to eliminate shareholder dilution from future employee stock options or equity grants. 

Over time, as a company issues more stock options, the firm's total number of shares outstanding will increase due to employees exercising their options. As a result, the effect will be the dilution of existing investors. A solution to this problem would be a buyback offsetting this effect.

Repurchasing shares is a more straightforward process for companies with large cash reserves. By using existing cash, firms can purchase shares back more aggressively, decreasing their total outstanding shares and increasing earnings per share (EPS).

There are other reasons why a firm may want to repurchase shares, such as:

  • For example, the firm may not want to commit itself to pay a dividend or increasing the amount of a pre-existing dividend payment. In addition, investors may get upset if the firm has a bad year and cannot keep up with the new dividend payment.
  • With increased dividends comes a larger tax burden. The company's larger shareholders may not want this and decide to repurchase shares because there are no immediate tax implications for shareholders.

While there seems to be an abundance of positive effects through a share repurchase program, there are still some things that businesses should keep in mind before implementing one. 

A widely held opinion is that when these companies are repurchasing shares, they tend to do it when they have a lot of cash. This usually means that they are performing well and have been having success. These firms would then buy back their shares at a high valuation.

When companies buy back their shares at a cyclical price peak, they end up getting fewer shares for their money. When performance slows down, the business has fewer cash reserves too!

Investors should also be wary when companies announce plans to buy back shares. If the firm is motivated by a potential increase in its valuation metrics, it may manipulate investors. 

In this scenario, the company is trying to create an appearance of rapid growth in earnings per share to appear like a solid investment opportunity. 

Floating stock

As discussed, floating stock is the total number of shares available for public investors to buy and sell. Sometimes the figure is expressed as an absolute figure (ex. 5 million shares) or as a percentage of the firm's total outstanding shares. 

So when a company has 1 million shares outstanding, but only 650,000 are available to the public, the float is either 650,000 or 65% of the total shares outstanding.

Stock held by insiders, shares held by the company (ex., treasury stock), and restricted stock that restricts the ability of the owner to sell it for some time are examples of what may not be included in floating stock.

There are some adjustments that investors may want to consider when calculating the stock float:

  • If an investor owns enough stock where they must file a quarterly report to the SEC (generally more than 5% of the total shares outstanding)
  • Or if a large long-term investor has no real intention of selling the stock and wants to hold on for a long period of time.

These individuals have no real intention of selling the stock; if they do, they must inform the public of their decision. These shares are effectively locked up and not going to be available to the public (at least in the short term).

The float is important for investors because it shows them how much stock is available to purchase.

The float gives valuable information to investors, like how a company may proceed in the future if it determines it needs more money or the ownership structure of the company. 

Investors need to know the float in times like a potential short squeeze to make accurate, well-informed decisions. 

Stocks that have a smaller float are generally more volatile than stocks with a larger float due to their limited availability. This ties to supply and demand. Investors may demand more shares than are available, resulting in the price of the shares increasing. 

The same is true for the opposite case. If investors don't demand a stock, then the price will decrease.

Reviewed and edited by James Fazeli-Sinaki | LinkedIn

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