What are Outstanding Shares.
The shares issued by the company, excluding the ones kept in the company treasury, are called Outstanding Shares. In other terms, shares held by any market participant (Retailers, HNIs, and Institutional investors) and company insiders are called outstanding shares. Outstanding shares are used to calculate the market capitalization of a company, which is one of the most important parameters while analyzing a company.
Generally, the outstanding shares meaning is confused with floating shares. But there is a big difference between both of them and that is – outstanding shares include the shares which can be traded openly in the market and also which can’t be openly traded in the market for example restricted shares kept with employees in the form of stock options, but Floating shares are only the ones that can be traded openly in the market.
Let’s take a hypothetical example to understand it better.
Company A issues 1000 shares, out of which 400 shares are floated to the public, 400 shares are held by company insiders and 200 shares are kept in the company treasury. Here, if you think the number of outstanding shares is 800, you are right.
Now that we have built the foundation of outstanding shares, let’s understand the formula to calculate outstanding shares.
Arithmetically Outstanding shares formula can be defined as-
Issued Stocks – (minus) Treasury Stocks.
Weighted average shares outstanding-
Weighted average shares outstanding is used as a substitute for the number of outstanding shares in some equations while calculating important financial ratios.
Let’s use an illustration to better understand how the weighted average shares outstanding work. A company with 1000 outstanding shares decides to perform a stock split in the ratio of 1:1, this would make the number of total outstanding shares from 1000 to 2000. Then the company declares an earning of 2000. If we have to calculate the Earnings per share, we have to use the formula-
Net income-dividends on preferred shares/shares outstanding.
Now the matter of thought is, should we take 1000 shares outstanding as denominator or 2000.
Here, the concept of Weighted average shares outstanding can help to solve this problem and it is calculated as follows-
(Outstanding shares x Reporting period 1) + (Outstanding shares x Reporting period 2)
In the above example, let’s say the reporting time is 0.5 years each so,
(1000×0.5) + (2000×0.5)= 1500. By putting the above calculation in the EPS calculation, the 2000/1500 weighted average of shares outstanding will be Rs.1.33 earnings per share.
Can the number of outstanding shares change?
The number of shares outstanding fluctuates over time. If a company issues new shares to the public, exercises a stock split or the employees of the company redeem the stock options, the number of outstanding shares tends to increase. On the other hand, if a company buys back the shares or practices share consolidation, the number of outstanding shares decreases.
Types of outstanding shares.
There are 2 types of outstanding shares,
- Basic outstanding shares
- Fully diluted outstanding shares.
Basic outstanding shares refers to the readily tradable shares present in the secondary market, whereas fully diluted outstanding shares is a term that takes the value of tradable shares as well as the convertible financial instruments such as preference shares, warrants, etc. into account.
Is knowing about outstanding shares really important
Yes, other than calculating market capitalization, Outstanding shares are used in many financial metrics to analyze a company fundamentally such as Earning per share (EPS) Price To Earnings ratio (fondly known as PE ratio),etc.
For EPS- the more the shares are outstanding, the more the profit is split.
For PE ratio- Fluctuations in the PE ratio is given substantial importance when analyzing a company. If the number of outstanding shares increases, the PE ratio will also increase, on the other hand, if the number of outstanding decreases, the PE ratio will also decrease.
Can Outstanding shares help you to make better investment decisions
The number of outstanding shares is also connected to the stability of the company. A company having larger number of shares outstanding will be much more stable than a company which has lower number of share outstanding. The reason being, if the shares are in fewer hands, it will be easier for them to manipulate the stock price by increasing and decreasing the demand and supply. Hence, one can make safer choices and avoid getting trapped in manipulative stocks by knowing about outstanding shares and ultimately avoid blowing their capital.
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