What Is Outstanding Shares & Why Does It Matter?
Gain crucial insights into outstanding shares and their profound influence on a company's market value and investor decisions.
Outstanding shares are a fundamental metric in finance, representing a company’s total equity in the hands of investors. Understanding this figure offers insights into a company’s ownership structure, valuation, and financial performance. For anyone evaluating a company, recognizing how shares are categorized and how their numbers fluctuate provides a clearer picture of financial health and potential.
Understanding Outstanding Shares
Outstanding shares are the total number of a company’s shares currently held by all its shareholders. This includes shares owned by institutional investors, company insiders, and the general public. These shares are actively traded and represent units of ownership in the company. They distinguish themselves from shares that a company has the legal right to issue but has not yet put into circulation.
Outstanding Shares and Other Share Categories
Authorized shares represent the maximum number of shares a company is legally permitted to issue, as outlined in its corporate charter or articles of incorporation. This figure sets an upper limit on the total shares that can ever be distributed.
Issued shares are those that have been distributed from the authorized pool to shareholders. This category includes both shares currently held by investors (outstanding shares) and shares that the company has repurchased and holds itself (treasury shares). Therefore, issued shares are equal to the sum of outstanding shares and treasury shares.
Treasury shares are issued shares that the company has bought back from the open market. These repurchased shares are not considered outstanding; they do not carry voting rights and do not receive dividends. Companies may hold treasury shares for purposes such as future reissuance or to support employee stock plans.
How Outstanding Shares Change
The number of outstanding shares is not static and can change due to various corporate actions. When a company issues new shares, for example, through a public offering, secondary offering, or employee stock option exercise, the number of outstanding shares increases. This action often provides the company with additional capital but can dilute the ownership stake of existing shareholders.
Conversely, a company can reduce its outstanding shares through share buybacks, also known as share repurchases. In a buyback, the company purchases its own shares, decreasing the total number of shares in circulation. These repurchased shares become treasury stock.
Stock splits and reverse stock splits also impact the number of outstanding shares. A traditional stock split increases the number of shares outstanding while proportionally decreasing the price per share. For instance, a 2-for-1 split doubles the outstanding shares and halves the share price. A reverse stock split does the opposite, reducing the number of outstanding shares and increasing the price per share.
Why Outstanding Shares Matter
Earnings Per Share (EPS) is a profitability metric calculated by dividing a company’s net income by its outstanding shares. A change in the number of outstanding shares impacts EPS; for example, an increase in shares without a corresponding increase in net income will lower the EPS.
Market capitalization, which represents a company’s total market value, is determined by multiplying the current share price by the number of outstanding shares. This calculation provides a quick measure of a company’s size and overall worth in the stock market.
Furthermore, outstanding shares determine the voting power of shareholders in corporate decisions. Common shareholders typically have one vote per share, allowing them to influence matters such as the election of the board of directors and major corporate actions. Outstanding shares also play a role in other per-share metrics, such as dividends per share and book value per share, used for valuation and financial analysis.