Stock Investing 101 – Outstanding Shares

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Outstanding Shares

What are Outstanding Shares?

Outstanding shares are the shares available with the shareholders of the company at the given point of time after excluding the shares which are bought back by the company and it is shown as the part of the owner’s equity in the liability side of the balance sheet of the company.

A company also often keeps a portion of its outstanding shares of stock in its own treasury, from both the initial stock issue as well as stock repurchases. These are called “treasury shares,” and are not included in the the balance. Increasing treasury shares will always result in decreases or (and vice-versa).

Outstanding Shares vs Authorized Shares

Outstanding shares differ from Authorised shares (issued shares) as authorized shares are the number of shares that a corporation is legally allowed to issue whereas outstanding stocks are the one already issued in the market.

Let us take an example of McDonald’s.

Here we note that Authorized Common Shares are 3.5 billion, however, outstanding stocks issued are 1.66bn only.

  • So at any given point in time, outstanding stocks number cannot be greater than the number of authorized shares. Generally, the company authorizes more shares than the actual issuance size. The key reason for it is efficiency and practicality.
  • If the company issue all the authorized shares but then need to grant more shares in the future, the company would need to authorize more shares at that point.
  • This requires a board and stockholder vote, and then a document to be filed. This costs money (legal fees and filing fees). However, if the company has excess authorized shares, it can issue those with much less effort, typically just approval of the board of directors.

Outstanding Shares Formula

Below is the Formula

  • The number of stocks outstanding is equal to the number of issued shares minus the number of shares held in the company’s treasury.
  • It’s also equal to the float (shares available to the public and excludes any restricted shares, or shares held by company officers or insiders) plus any restricted shares.

For example, if a company issues a total of 1000 shares. 600 shares are issued as floating shares to the general public, 200 shares are issued as restricted shares to company insiders, and 200 are kept in the company’s treasury. In this case, the company has a total of 800 outstanding shares and 200 treasury shares.

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Two Types of Shares Outstanding

Basic shares mean the number of outstanding stocks currently outstanding, while the fully diluted number takes into account things such as warrants, capital notes, and convertible stock. In other words, the fully diluted number of Stocks outstanding tells you how many outstanding stocks there could potentially be.

Warrants are instruments that give the holder a right to purchase more outstanding stock from the company’s treasury. Whenever warrants are activated, stocks outstanding increase while the number of treasury stocks decreases. For example, suppose XYZ issues 100 warrants. If all these warrants are activated, then XYZ will have to sell 100 shares from its treasury to the warrant holders.

Why Shares Oustanding Keep on Changing?

Outstanding stocks will increase when the company increases its share capital by selling new stock to the public or when it declares a stock split (company divides its existing shares into multiple shares to improve liquidity).

Conversely, stocks outstanding will decrease if a firm completes a share buyback (repurchase of its own shares by the company which decreases the number of outstanding stocks in the public and increases the treasury shares amount) or a reverse split (consolidation of a corporation’s shares according to a predetermined ratio).

How Shares outstanding Affect Investors?

A greater number of stocks outstanding means a more stable company given greater price stability as that it takes many more shares traded to create a significant movement in the stock price. Contrary to this, the stock with a much lower number of outstanding stocks could be more vulnerable to price manipulation, requiring much fewer shares to be traded up or down to move the stock price.

A number of outstanding stocks are an important value for any investors as it is included in the latest market capitalization and earning per share calculation as shown below:

Company A has issued 25,800 shares and has offered 2,000 shares to two partners, and has retained 5,500 stocks in the treasury.

  • Outstanding shares Formula : Shares issued – treasury shares – restricted shares = 25,800 – 5,500 – (2 x 2,000) = 16,300.
  • Suppose, stock is currently at $35.65. Therefore, the market capitalization of the firm is 16,300 x $35.65 = $581,095.
  • Company A has a net income of $12,500 as per the latest financials. Therefore, the firm’s earnings per share is $12,500 / 16,300 = $0.77.

After three months, the company’s management decides a share buyback of 1,000 shares. The stock price after 3 months is $36.88.

  • Therefore outstanding stock after three months = 16,300 – 1, 000 = 15,300.
  • Market cap after three months = 15,300 x $36.88 = $564,264
  • EPS after three months = $12,500 / 15,300 = 0.82
  • As the number of outstanding stock decreases by 1,000, the company’s EPS increases by 6.54%.
  • Also, stocks outstanding is an important parameter used in the calculation of Price to book value (P/B ratio) which is an indicator of how much shareholders are paying for the net assets of a company.

Conclusion

Outstanding shares are the shares owned by stockholders, company officials, and investors in the public domain, including retail investors, institutional investors, and insiders. However, stocks outstanding does not include treasury stock.

Video on Outstanding Shares

This has been a guide to Shares Oustanding, meaning, definition, formula, and types. Here we also discuss top outstanding shares vs authorized shares along with practical examples and why an investor should care about stocks outstanding. You may also go through the following recommended articles on basic accounting –

Investing 101

Investing your money is a great way to make your money work for you. But how do you start investing in the stock market? Where do you begin? Don’t you have to already be rich to invest in the stock market? Are you risking losing it all? The answers are simpler than you think. Welcome to investing 101 at Investment U!

This guide to investing for beginners will teach you the basics of making your money work while you’re busy with the rest of your life. And although putting money into real property or a business constitutes an investment too, here we’re talking about the stock market.

Investing 101: Investing Is Essential for Financial Growth

Stock market investments pay about 19,700% more interest (over the long term) than if you left that same money in your checking account. Even better? You don’t need to start with a huge lump sum. Investing even an initial hundred bucks will put you on the road to financial comfort.

But why is investing in the stock market so important?

In a word… inflation. The $100 you save today is simply not going to have the same purchasing power when you’re ready to retire, especially if you’re 30 years away from that goal. For example, $100 in 1965 would be worth only $13.76 in 2020. And your savings account’s interest rate typically isn’t on par with the rate of inflation. But if you invest wisely, you stand to keep up, at minimum, and earn even more.

Listen to the audio version of this article:

Basic Investing Terms and Definitions

  • Investing: Investing is different from saving money. When you save, you’re amassing money, but there may be little to no interest. Investing can yield more income over a long-term period.
  • Stocks: You probably know what the stock market is in theory. The full definition is the exchange of public ownership of shares (stocks) of a company by buyers and sellers. It offers businesses an opportunity to expand by raising more money. It allows investors to earn money that they’ve exchanged for partial ownership of a company. Though the stock market is more volatile than other investment opportunities (making it possible to lose money), it also offers more reward potential.
  • Exchange-traded funds (ETFs): For some built-in diversification, you can use exchange-traded funds. These can be a low-cost way to access many stocks and various strategies. Our ETF Expert Nicholas Vardy covers these strategies in more detail.
  • Bonds:Bonds are individual loans made to investors, whether by businesses or the government. These tend to carry a much lower risk than stocks but also offer lower interest rates and usually fixed terms (meaning lower upside potential than stocks). Bond maturation rates also depend on the type of bond and can vary greatly – from a few months to more than a decade in some cases.
  • Commodities:Commodities are basic goods used in commerce, which are exchanged for other similar goods. Commodity speculators bank on the good’s price changing to make a profit.
  • Mutual funds: A portfolio manager manages a mutual fund – a pool of money investors contribute to. Portfolio managers then decide where the money would be best invested. Since the manager will invest in a wide variety of stocks, bonds and commodities, these funds are lower risk than investing in one or two stocks.

Investing 101 Tips and Tricks

  • Start small: It’s okay if you don’t have a lot of money to start with – although some financial institutions will require a minimum initial deposit. Compare institutions and decide which one is right for you. Full-service brokers – who not only manage your funds but also provide investment and retirement advice – will naturally take bigger fees and commissions than online brokers. They also often require much bigger accounts. Some expect an initial minimum of $25,000 in assets.
  • Do your research: There’s a wealth of investment information available. You can compare things like minimum initial deposits, as well as what kinds of fees and commissions you can expect to pay. If you’re investing through employer retirement accounts, request as much literature as you can to understand your options. You should also research anything you invest in, from tech companies to hotel chains. And, if all else fails, ask an expert.
  • Be consistent: Yes, your money should grow in a well-managed investment account, but if you really want to maximize your profits, you need to consistently invest more into the fund. Decide how much you can contribute and how often – monthly, quarterly or yearly – and stick to it. Just as it’s okay to start small, it’s okay to make small contributions… as long as you’re making them. Even if you’re on a tight budget, try investing 1% of what you make per year into your stocks.
  • Automate it: Don’t start in the stock market expecting to play the field like a seasoned broker… Your best bet is to pick something that’s low risk through a professional manager or broker who will do most of the work for you. Or you can invest your money yourself, which will require more research but save you fees and commissions. Stay informed and ask questions, but don’t fall into the constant “buy, panic, sell” trap. The goal is to “set it and forget it.”
  • Diversify: Investing in different places, different types of stocks and types of funds can lower risk. In short, if you invest everything in one place, you run the risk of losing everything in one fell swoop should the company go under.
  • Think long term: Investing isn’t a get-rich-quick scheme… usually. There will always be the folks who strike it rich, like those who bought Apple or Microsoft early. But in general, you want to keep your money invested. The longer, the better. Ideally, you should think of your stock investments as “untouchable,” so you’re not tempted to withdraw funds unless it’s a true emergency. You’ll also limit the fees involved when you leave your money alone.

Think of a diverse stock portfolio like an insurance policy for your future. You’ll be more likely to beat inflation with stocks than a savings account, and you have the potential to earn far more profit on top of that. With careful research, expert advice and consistent contributions, the stock market can be a hugely effective vehicle for retirement savings. And with that, you’ve now completed investing 101!

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