Outstanding Shares: Definition & Importance for Investors

Outstanding shares represent the number of a company’s shares that are traded on the secondary market and, therefore, available to investors. Outstanding shares include all restricted sharesRestricted StockRestricted stock refers to an award of stock to a person that is subject to conditions that must be met before the stockholder can exercise the right to transfer or sell the stock. It is commonly issued to corporate officers such as directors and senior executives. held by the company’s officers and insiders (senior employees), as well as the equity portion owned by institutional investors such as mutual funds, pension funds, and hedge funds.

Before their availability on the secondary marketSecondary MarketThe secondary market is where investors buy and sell securities from other investors. Examples: New York Stock Exchange (NYSE), London Stock Exchange (LSE)., shares are authorized, issued, and, finally, purchased by investors who became equity owners or shareholders of the issuing company. Shareholders of common stock typically possess the right to participate in annual shareholders meetings and contribute toward the election of the company’s board of directors.

The number of shares outstanding increases when a company issues additional shares or when employees exercise stock optionsStock OptionA stock option is a contract between two parties which gives the buyer the right to buy or sell underlying stocks at a predetermined price and within a specified time period. A seller of the stock option is called an option writer, where the seller is paid a premium from the contract purchased by the stock option buyer.. Corporations raise money through an initial public offering (IPO) by exchanging equity stakes in the company for financing. An increase in the number of shares outstanding boosts liquidity but increases dilution.

Conversely, the outstanding number of shares will decrease if the company buys back some of its issued shares through a share repurchase program.

Basic and Diluted Shares Outstanding

The number of shares outstanding can be computed as either basic or fully diluted. The basic number of shares outstanding is simply the current number of shares available on the secondary market, whereas the fully diluted shares outstanding calculation takes into account diluting securities such as convertibles (warrantsStock WarrantsStock warrants are options issued by a company that trade on an exchange and give investors the right (but not obligation) to purchase company stock at a specific price within a specified time period. When an investor exercises a warrant, they purchase the stock, and the proceeds are a source of capital for the company., options, preferred shares, etc.).

Therefore, if a company owns any diluting securities, that would indicate a potential increase in the number of shares outstanding in the future.

Shares Outstanding vs. Treasury Shares

Outstanding shares differ from treasury sharesTreasury StockTreasury stock, or reacquired stock, is a portion of previously issued, outstanding shares of stock that a company repurchased from shareholders., which are the shares held by the company itself and which cannot be sold in the open market. Treasury shares plus outstanding shares together form the total number of issued shares.

Authorized Shares

The number of authorized shares can be substantially greater than the number of shares outstanding since authorized shares represents the maximum possible number of shares a company can issue. The outstanding number of shares may be either equal to or less than the number of authorized shares. For example, a company might authorize 10 million shares to be created for its IPO, but end up actually only issuing nine million of the shares.

Shares Outstanding vs. Floating Shares

The number of floating shares is found by taking the number of shares outstanding minus closely-held shares – a large number of shares that are held by one party, be it an individual or a small group of controlling shareholders, such as officers or directors of the company.

Floating shares serve as a good representation of the company’s active shares or share turnover among various investors in the market, excluding parties holding substantial portions of equity.

Where to Find the Number of Shares Outstanding?

There are some useful public sources of information where the total number of shares outstanding can be found. They include:

• Investor relations webpage (applies only to publicly listed companies)
• Authorized information service (databases provided by local financial authorities such as the U.S. Securities and Exchange Commission or U.S. EDGAR)
• Stock exchanges (on their websites)

Investors may look at the shareholder’s equity section on a company’s balance sheet. The shareholder’s equity section provides the sum of the total authorized shares, the total number of shares outstanding, and the total floating shares.

Alternatively, the total number of shares outstanding can be easily calculated as a company’s market capitalization, divided by the current share price.

Share Repurchase Program

When companies consider their stocks to be undervalued, they often initiate a share repurchase program, buying back some of its issued shares at a favorable price.

The buyback increases the market value of the existing shares in the open market. It also raises the company’s earnings per shareEarnings Per Share Formula (EPS)EPS is a financial ratio, which divides net earnings available to common shareholders by the average outstanding shares over a certain period of time. The EPS formula indicates a company’s ability to produce net profits for common shareholders. figure (EPS) since earnings are divided by a smaller number of shares. A share repurchase generates a higher income per share, making each share more valuable.

Practical Example

Company ABC is a leading retail company that sells cell phones. The company recently issued 26,900 shares through an IPO. It also offered 3,000 shares to each of the two managing directors, and has 5,600 treasury shares.

John, as an investor, would like to calculate the company’s market capitalization and its earnings per share.

First, he calculates the total number of shares outstanding:

= Issued shares – Treasury shares – Restricted shares

= 26,900 – 5,600 – (2 x 3,000) = 15,300

ABC’s stock is currently trading at $28.67. Thus, the market capitalization of the company is 15,300 * $28.67 = $438,651.

ABC’s latest earnings report shows a net income of $14,500. Consequently, the earnings per share is equal to 14,500 / 15,300 = $0.9477.

After three months, the company decides to repurchase 1,000 shares. The stock is trading at $27.49. 15,300 – 1,000 = 14,300, so the company’s market capitalization is then 14,300 * $27.49 = $393,107.

With fewer shares in the market, earnings per share increases as follows:
EPS = $14,500 / 14,300 = $1.013

In the end, as the number of outstanding shares decreases by 1,000, the company’s EPS increases by 6.89%.

More Resources

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In order to help you become a world-class financial analyst and advance your career to your fullest potential, these additional CFI resources will be very helpful:

• Authorized SharesAuthorized SharesAuthorized shares, or authorized stock, are simply a legally allowed maximum number of shares that a company can issue to investors. The number of authorized shares is specified in the company’s articles of incorporation. You can also see the number in the capital accounts
• Market CapitalizationMarket CapitalizationMarket Capitalization (Market Cap) is the most recent market value of a company’s outstanding shares. Market Cap is equal to the current share price multiplied by the number of shares outstanding. The investing community often uses the market capitalization value to rank companies
• Mutual FundsMutual FundsA mutual fund is a pool of money collected from many investors for the purpose of investing in stocks, bonds, or other securities. Mutual funds are owned by a group of investors and managed by professionals. Learn about the various types of fund, how they work, and benefits and tradeoffs of investing in them
• US EDGARUS - EDGAREDGAR is a database where U.S. public companies file regulatory documents such as annual reports, quarterly reports, 10-K, 10-Q, prospectus