The number of a company’s shares that are traded on the secondary market and are available to investors
Written byJeff Schmidt
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Outstanding shares represent the number of a company’s shares that are traded on the secondary market and, therefore, are available to investors. Outstanding shares include all restricted shares 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 market, 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 options. 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.
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. On the other hand, the fully diluted shares outstanding calculation takes into account diluting securities such as convertibles (warrants, 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.
Outstanding shares differ from treasury shares, 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.
The number of authorized shares can be substantially greater than the number of shares outstanding since authorized shares represent 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.
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.
A publicly traded company’s total number of shares outstanding can usually be found on their investor relations webpage, on stock exchanges’ websites, or in the shareholder’s equity section on a company’s balance sheet as filed with an authorized information service like the U.S. Securities and Exchange Commission. This 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.
When companies consider their stocks to be undervalued, they often initiate a share repurchase program, buying back some of their 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 share 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%.
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