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Imagine you’re holding a winning stock. But wait, how do you know how big this stock’s treasure chest is? This is where the concept of outstanding shares comes into play.
What are outstanding shares?
Outstanding shares are like slices of a pie. Imagine a company is a pie, and it is sliced into many pieces.
These slices are the shares, and the portion that people own, including you and me, big investors, and even company officers, are known as the outstanding shares. In financial documents, you’ll often find these listed under the term “Capital Stock.”
Types of outstanding shares
- Basic outstanding shares
Simply put, basic outstanding shares are the shares a company has issued and are freely traded in the stock market. Why should you care? Because this number helps you judge the company’s size and how well it’s doing.
Keep in mind, that this number can change. If a company issues more shares or buys some back, it can affect your slice of the pie.
- Fully diluted outstanding shares
Think of this as the ‘what-if’ scenario. It includes not just the basic shares, but also any extra shares that might pop up if all convertible securities like options or bonds get turned into stock.
It’s like looking at a bigger, potential future pie. It helps you understand how much your share might dilute if all these convertibles get activated. Like basic shares, this number can change based on several factors.
How do you find the number of shares outstanding?
- Look at the company’s financial statements.
- Check the investor relations page on the company’s website.
- Scan the company’s SEC filings, if it’s a U.S. company.
- Use financial news websites like Yahoo Finance.
- Check stock exchange websites where the company is listed.
Why bother? Because knowing this number helps you make smarter investing decisions.
How do outstanding shares affect financial metrics?
Companies and investors often use the number of outstanding shares to measure how well a company is doing, or its valuation. Here are some ways it’s used:
- Market capitalisation
It’s calculated by multiplying the number of outstanding shares by the current stock price. So if there are a million outstanding shares and each is worth $10, the market capitalisation would be $10 million.
- Earnings per share
Here, the net income of the company is divided by the number of outstanding shares. This gives an idea of how profitable each share (or slice of the pie) is.
- Cash flow per share
This measures how much cash a company generates, again divided by the number of outstanding shares.
| Financial metric | Calculation method |
| Market capitalisation | Outstanding Shares x Stock Price |
| Earnings per share | (Net income – Preferred dividends) ÷ Average outstanding shares |
| Cash flow per share | (Operating cash flow – Preferred dividends) ÷ Outstanding shares |
Special scenarios affecting outstanding shares
Stock splits
Sometimes shares can get pretty expensive. When that happens, the company might decide to break each share into smaller parts, making it easier for more folks to buy in. This move is called a stock split.
When a company does a stock split, it increases the number of shares available, but the overall value of the company stays the same.
Reverse stock splits
In a reverse stock split, a company consolidates its existing shares into fewer, higher-valued shares. This often happens to comply with stock exchange rules that require a minimum share price.
Outstanding shares in mergers and acquisitions
In India, when Walmart bought the shopping company Flipkart, this was a big deal. One of the things that helped set the price for Flipkart was how many slices of the ‘Flipkart pie’ were out there, or in other words, its outstanding shares.
So, the number of these shares helps us understand what a company is worth. This is crucial when figuring out how much one company should pay to buy another or how they should join forces.
Conclusion
Understanding outstanding shares doesn’t have to be rocket science. At its core, it’s just a way to measure how much of a company is owned by shareholders. It’s a dynamic figure that can change over time due to various factors like stock splits, reverse stock splits, and even mergers and acquisitions.
By knowing how to evaluate it, you are well on your way to understanding a company’s worth, how profitable it is, and how it compares to others in the market.
FAQs
Authorised shares suggest the upper limit or the maximum number of shares a company is allowed to issue to the public. Outstanding shares are a portion of authorised capital that is actually issued to the public.
Outstanding shares are the number of shares held by all the shareholders.
Let’s say a company, ABC Corp, has 1,000 shares out there, priced at ₹100 each. So, the total value of outstanding shares is ₹100,000. Now, ABC has decided to buy back 100 of its shares. So, the market has 900 shares of ₹100 each, with the total value being ₹90,000.
The number of outstanding shares changes when companies decide to increase or decrease their equity share capital. This happens through various corporate actions like bonus issues, mergers, stock splits, buybacks, etc.
Whether it is good or bad depends purely on the company’s requirements and efficiency. A higher number of outstanding shares suggests that the company has diluted more ownership and has lesser control. But, it also suggests that the company has more capital.
Stock float is a portion of outstanding shares. While outstanding shares include all the shareholders, stock float eliminates the shares held by insiders, such as the management, directors, the owner’s family, etc. Stock float considers the shares held purely by the public.