What Does It Mean When a Company Has Outstanding Stock?
Understand what outstanding stock means for a company, its impact on market value and ownership, and how its count changes.
Understand what outstanding stock means for a company, its impact on market value and ownership, and how its count changes.
When a company forms, it divides its ownership into units called shares of stock. These shares represent fractional ownership in the business, and investors can purchase them to become shareholders. Understanding the different categories of shares is important for evaluating a company’s structure and potential.
Outstanding stock refers to the total number of a company’s shares currently held by all its shareholders, including insiders. These shares are actively traded and represent ownership stakes in the company.
The number of outstanding shares is dynamic and can change over time. These shares carry voting rights and are eligible to receive dividends.
Understanding outstanding stock requires differentiating it from other share classifications, such as authorized shares and treasury stock. Authorized shares represent the maximum number of shares a company is legally permitted to issue. This figure acts as an upper limit, and a company cannot issue more shares than its authorized amount without obtaining shareholder approval.
Issued shares refer to the total number of shares a company has distributed to shareholders since its inception. This category includes both shares currently held by investors (outstanding shares) and shares that the company has repurchased and holds itself (treasury stock). Therefore, all outstanding shares are also issued shares, but not all issued shares are necessarily outstanding.
Treasury stock, also known as reacquired shares, consists of shares that the company has bought back from the open market. When shares become treasury stock, they are no longer considered outstanding; they lose their voting rights and do not receive dividends. Companies may repurchase shares for various reasons, such as to reduce the number of outstanding shares or to use them for employee stock option plans. The relationship between these categories can be summarized by the formula: Outstanding Shares = Issued Shares – Treasury Shares.
The number of outstanding shares is important for investors and a company’s financial metrics. It is a fundamental component in calculating a company’s market capitalization, the total value of its outstanding shares. Market capitalization is determined by multiplying the current share price by the total number of outstanding shares.
Outstanding shares are also used to calculate Earnings Per Share (EPS). EPS is derived by dividing a company’s net income by its outstanding shares. A lower number of outstanding shares can result in a higher EPS, making the company appear more profitable on a per-share basis. Furthermore, outstanding shares determine shareholder voting power, as common shareholders receive one vote per share owned. Changes in the number of outstanding shares can also lead to dilution, where an increase in shares outstanding decreases the ownership percentage of existing shareholders.
The number of outstanding shares can change due to various corporate actions. One common way the count increases is through share issuances, where a company sells new shares to raise capital, for example, through public offerings or by issuing shares for employee stock options. This action increases the total number of shares available in the market.
Conversely, share buybacks, or stock repurchases, reduce the number of outstanding shares. When a company buys back its own shares from the open market, these shares are either retired or held as treasury stock, decreasing the outstanding count. Companies conduct buybacks to enhance shareholder value, improve financial ratios like EPS, or signal confidence in their future.
Stock splits and reverse stock splits also alter the number of outstanding shares. A stock split increases the number of shares outstanding while proportionally decreasing the share price, making shares more accessible to a broader range of investors without changing the company’s total market value. A reverse stock split does the opposite, reducing the number of outstanding shares and increasing the per-share price, often to meet exchange listing requirements or improve market perception. Neither type of split impacts the overall value of an investor’s holdings or the company’s market capitalization.