Is Preferred Stock Included in Shares Outstanding?

Companies finance their operations and growth through a combination of debt and equity. Equity, representing ownership stakes, can take various forms with distinct characteristics. Understanding how different types of stock are classified and counted is fundamental for interpreting a company’s financial health and valuation metrics.

What Are Shares Outstanding?

Shares outstanding represent the total number of common shares a company has issued. This count includes shares owned by institutional investors, company insiders, and the public, but excludes treasury stock. The number of outstanding shares can fluctuate due to corporate actions like issuing new shares or share buybacks.

This metric is fundamental for financial analysis. It serves as the denominator in calculating key financial ratios such as market capitalization (share price multiplied by shares outstanding) and Earnings Per Share (EPS) (net income divided by shares outstanding). Shares outstanding are primarily tied to common equity, reflecting its voting rights and potential capital appreciation.

What Is Preferred Stock?

Preferred stock is a type of equity that signifies ownership in a company, but differs significantly from common stock. Often described as a hybrid security, preferred stock combines features of both debt and equity. This unique position stems from its typical structure, which includes fixed dividend payments, similar to bond interest payments, and no maturity date.

Holders of preferred stock receive preferential treatment over common stockholders. They have a higher claim on dividend payouts, meaning they must receive their dividends before common shareholders. In the event of a company’s liquidation, preferred stockholders have a priority claim on company assets, ranking below bondholders but above common stockholders. However, this preference comes at the cost of voting rights, which are absent for preferred shareholders.

Preferred Stock and Shares Outstanding

Preferred stock is not included in the “shares outstanding” calculation. This distinction is important for investors and analysts who rely on shares outstanding to evaluate per-share metrics like market capitalization and Earnings Per Share. The primary reason for this exclusion lies in the differing nature and rights of preferred stock compared to common stock.

Shares outstanding refers to the common equity base representing the residual ownership claim in a company. Common shareholders bear the primary risk and have potential for significant capital appreciation; their ownership links to voting power and company performance. Preferred stock, with its fixed dividends, liquidation preference, and lack of voting rights, behaves more like a fixed-income security, providing a stable income stream rather than direct participation in company performance.

Companies account for preferred stock separately on their balance sheets. While preferred shares are issued by a company, they are not factored into per-share metrics because their financial characteristics and claims on earnings are fundamentally different. For instance, preferred dividends are deducted from net income to determine income available for common shareholders, impacting EPS. Although a company might report “total shares issued,” encompassing both common and preferred stock, this is a distinct metric from “shares outstanding” in financial analysis.