As a stock market beginner, it is important for you to understand key terms related to the share market.
One such important term is Outstanding shares or Shares Outstanding.
Outstanding shares is the total number of shares available in the secondary market. Through outstanding shares, investors can measure a stock’s liquidity.
If you do not understand what are outstanding shares or how to calculate it, then this article is perfect for you.
Today we discuss:
- The definition & meaning of outstanding shares
- How to calculate outstanding shares &
- The main differences between outstanding shares, float and market capitalisation.
What is the meaning of ‘Outstanding Shares’?
Outstanding shares is the total number of shares issued by a company to its investors.
Outstanding shares is calculated by adding all the shares held by:
- Retail investors (floating stock)
- Company employees (as part of employee stock option plan)
- Institutional investors like banks, pension funds etc
Outstanding shares are often confused with float and market capitalisation. But they are very different.
To understand the differences between outstanding shares and float, we first need to understand the types of shares.
What are Issued Shares?
Issued shares is the total number of shares a company can issue in the market. The quantity of issued shares is approved by the board of directors.
What are Restricted Shares?
Restricted shares are the shares owned by the company’s management or employees. Restricted shares are not available for trading with the general public.
What are Treasury Shares?
Treasury shares are outstanding shares which are repurchased by the company for its own use.
How to Calculate Outstanding shares?
Let us understand how to calculate outstanding shares with a simple example.
A food distribution company, FoodZilla Ltd has issued a total of 10,000 equity shares. Of these, 6,000 shares are floating stock i.e. held with the general public.
2,000 shares are with the company’s director and employees. Another 2,000 shares are treasury shares.
The formula for calculating Outstanding Shares = Total Issued stock – Treasury shares.
So, in the above example, the outstanding shares of FoodZilla Ltd would be 8,000 shares with 2,000 shares as treasury shares.
Let us now understand the main differences between:
- Outstanding Shares vs Float or Floating Stock
- Outstanding Shares vs Market Cap (capitalisation)
- Outstanding Shares vs Issued Shares
Outstanding Shares vs Float
Shares Outstanding refers to the total shares of a company in the market. It includes
shares owned by retail investors, company insiders and institutional investors.
Floating stock refers to the number of shares available for free trading.
For example: FoodZilla Ltd issued 10,000 shares in the market, of which 2,000 shares are held by company insiders and 1,000 by institutional investors. In this case, the floating stock will be 7,000 only (10,000-2000-1000).
Outstanding Shares vs Market Capitalisation
Market capitalisation is the total market value of a company’s shares.
The formula for Market Capitalisation = Market value of the share * no of shares outstanding.
In the example of FoodZilla Ltd: If the company’s share price is Rs 45, then its market capitalisation will be Rs 3,60,000 (Rs 45 * 8,000)
Outstanding Shares vs Issued Shares
Outstanding shares and issued shares are different. At times, outstanding shares can be less than issued shares.
Let’s say FoodZilla Ltd got approval from its board to issue 15,000 shares in the secondary market. But for some reasons, they issued only 10,000 shares. So, 10,000 shares is the total issued shares.
Where to Find the Number of Shares Outstanding?
Outstanding shares are reflected as capital stock under a company’s balance sheet.
You can also easily calculate outstanding shares by dividing a company’s market capitalisation by its share price.
In the example of FoodZilla Ltd:
Market capitalisation = Rs 3,60,000
Share price = Rs 45
Therefore, outstanding shares = 8,000 shares
Why Does the Number of Outstanding Shares Change?
The number of shares outstanding is not constant. It keeps on changing due to the following factors:
- Share Buyback: Share buyback is when companies buy back their own shares from the shareholders. The number of outstanding shares reduces during a share buyback.
- Share Splits: In a share split, the number of shares outstanding increases but the market capitalisation remains the same.
- Bonus Shares: The number of outstanding shares increases when a company announces bonus shares.
- Reverse Stock Split: In a reverse stock split, the number of outstanding shares reduces while the share price increases. The market capitalisation stays the same.
How a change in shares outstanding can affect crucial financial ratios
Even a small increase or decrease in shares outstanding can have a huge impact on key financial ratios like Price to Earnings ratio or Earnings Per Share etc.
Let us understand how outstanding shares affect Earnings Per Share ratio and Price to Earnings ratio.
Outstanding Shares & EPS ratio – Indirect Relationship
|Number of Outstanding Shares||Earnings per Share ratio|
Outstanding Shares & P/E ratio – Direct Relationship
|Number of Outstanding Shares||Price to Earnings Ratio|
Outstanding shares are important as it shows a company’s liquidity. But there are several other parameters that investors should analyse before investing in a company.
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