The term “outstanding shares” in the financial industry refers to all issued shares of stock that are not kept in the company’s treasury. Shares held by the general public, institutional investors, and business insiders are all included in this.
Specific crucial indicators, such as market capitalization (number of shares outstanding * current share price) and earnings per share (net income after preferred dividend payments/shares outstanding), consider all outstanding shares.
Understanding that not all stocks are publicly traded is necessary to comprehend the definition of outstanding shares. For example, public shares of a corporation and privately held shares can only be owned by those who work there. The outstanding shares are the total number of shares that any investor may publicly trade.
A firm is privately held until the majority owners and the board of directors elects to register for public trading. Then, they must file a document with the Securities and Exchange Commission, the government body in charge of controlling the financial industry, particularly the stock market, to achieve this. In this way, the government agency will examine all critical economic data, such as the number of shares issued and outstanding, to ensure that there are no omitted figures and that all balance sheets are accurate.
How to Calculate Shares Outstanding
A corporation would deduct the number of shares kept in its treasury from the total number of shares it has issued to determine the number of shares outstanding.
The formula for Outstanding Shares
Issued shares minus Treasury shares equal shares outstanding.
Illustration of Outstanding Shares
For instance, suppose a business issues 1000 shares altogether. 200 shares are granted as restricted shares to business insiders, 200 shares are maintained in the company’s treasury, and 600 shares are issued as floating shares to the general public. In this instance, the business holds 200 treasury shares and 800 outstanding shares.
There are two types of outstanding shares. These are the following:
- Basic Share
- Diluted Share
Basic shares refer to the number of currently outstanding common shares, whereas fully diluted shares take into account warrants, capital notes, and convertible stock. In other words, the completely diluted number of Stocks outstanding indicates the maximum number of Outstanding Stocks.
The owner of warrants can use business funds to purchase more shares of outstanding stock. As a result, outstanding shares rise as warrants is exercised, while Treasury stock counts fall. Consider the scenario when XYZ issues 100 warrants. If these warrants are exercised, XYZ will be required to sell 100 shares from its treasury to the warrant holders.
Knowing that a company’s outstanding share count may alter is also helpful. Many commonly used financial measures are calculated using a company’s number of outstanding shares. For example, market capitalization and earnings per share (EPS) are calculated using a company’s total number of outstanding shares.
The number of outstanding shares can determine a company’s liquidity. But before investing in a company, investors need to consider several additional factors.