Definition: Outstanding shares, also known as issued shares, are the common shares of a firm, which are owned by its shareholders, including retail investors, institutional investors, and insiders.
What is the definition of shares outstanding? The number of shares outstanding depends on corporate actions. For example, the outstanding stocks will increase when a firm increases its share capitalby selling more stock to the public or when it declares a stock split. Conversely, it will decrease if a firm completes a share buyback or a reverse split.
These shares are reported on the balance sheet and are important for the calculation of a firm’s market capitalization, earnings per share, dividend distribution, and voting rights. To calculate the number of outstanding shares, we need to know the issued shares, the repurchased shares (treasury shares), and the shares that the managing partners take (restricted shares).
Let’s look at an example.
Example
Company A is a leading retail company that sells wristwatches. With the IPO, the company has issued 25,800 shares, has offered 2,000 shares to each of the two managing partners, and has retained 5,500 stocks in the treasury.
Alex wants to calculate the market cap of the company and the earnings per share. The outstanding shares formula is calculated as follows:
Shares issued – treasury shares – restricted shares = 25,800 – 5,500 – (2 x 2,000) = 16,300.
The company’s stock currently trades at $35.65. Therefore, the market capitalization of the firm is 16,300 x $35.65 = $581,095.
In its latest earnings, the company has released a net income of $12,500. Therefore, the firm’s earnings per share is $12,500 / 16,300 = 0.77.
In two months, the company’s management decides a share buyback of 1,000 shares. The stock price is $36.88.
Therefore:
Outstanding stock = 16,300 – 1, 000 = 15,300.
Market capitalization = 15,300 x $36.88 = $564,264
EPS = $12,500 / 15,300 = 0.82
Note that as the number of outstanding stock decreases by 1,000, the company’s EPS increases by 6.54%.
Summary Definition
Define Outstanding Shares: Outstanding stock means company stock that is authorized by a corporate charter and is currently issued to an investor.
