Outstanding shares of stock refers to the common stock issued by a corporation that is owned by investors other than the corporation itself. The number of shares outstanding is not hard to calculate, but you should not underestimate the importance of this figure. Common stock outstanding is the basis for determining which investors have the most votes and thus the largest influence at stockholders' meetings.
In addition, this measure is used to help analyze the company's financial position. Although you can usually look up the number of shares outstanding, that's not always convenient. Besides, it is useful to know how the number of shares outstanding is determined.
At any given time, a corporation has a specific number of shares authorized for sale. The shares actually sold are those that have been purchased by individual and institutional investors. These investors include company "insiders" and officers who own restricted shares. The total shares of common stock owned by these investors make up the outstanding shares.
Outstanding shares do not include treasury stock, which means shares that the corporation has repurchased from investors. Preferred shares are also excluded. Although preferred shares give their owners some ownership rights, they do not allow investors to vote at stockholders' meetings and are not considered part of the outstanding stock.
Total shares outstanding is usually listed on the firm's balance sheet and on its investor relations website. Shares outstanding must be reported on quarterly filings with the Securities and Exchange Commission. It's not always convenient to access these resources, so it's helpful to learn a common shares outstanding formula. There are a couple of ways to calculate outstanding shares.
To use the first method for calculating outstanding shares of stock, look on the firm's balance sheet. The balance sheet can be found in the company's annual report, which is usually available on its investor relations website. The number of common shares outstanding may be listed. If so, no calculation is needed. If not, divide the dollar amount listed under the heading "Capital Stock" by the stock's par value.
Suppose ABC Corporation reports the capital stock amount as $3 million with a par value of $2 per share. Divide $3 million by $2 and you find there are 1.5 million shares outstanding.
Not all companies establish a par value for common stock. Typically, a stock par value serves as a minimum selling price during an initial public offering and has little significance afterward. However, you can calculate a reasonably accurate estimate of the number of shares outstanding using the stock's market price and market capitalization or "market cap."
Market cap is simply the total market value of all outstanding shares of the company. Both figures are readily available for publicly owned companies on financial websites.
The outstanding common stock formula using this method is the market cap divided by the stock's per share price. For example, ABC Corporation might have a market cap of $60 million and a price per share of $40. Dividing $60 million by $40 equals 1.5 million outstanding shares.
For many companies, the number of outstanding shares often changes. For example, the firm may sell newly issued shares to raise capital. Companies also issue shares to employees who participate in stock ownership programs or who exercise stock options. Sometimes the board of directors will split the stock. For instance, in a two-for-one split, investors receive an additional share for each share already owned.
Stock splits of this type tend to reduce the per share price, making the shares more marketable. The number of outstanding shares may decrease at times. This will happen with a "reverse stock split." Companies may also repurchase shares previously sold to investors. Repurchased shares become treasury stock and no longer count as outstanding shares.