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What are outstanding shares?

Let’s go through an easy guide to outstanding shares and their role in company valuation

outstanding shares

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.

Outstanding shares are the slices of the company pie that everyone is holding, from big investment firms to retail investors like you and me. Knowing about these shares helps you figure out if the company is a small hidden gem or a massive empire.

So, if you want to hit the jackpot in the stock market, this blog is your first clue. Let’s go treasure hunting!

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 slices that people actually 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.”

Why do the numbers of outstanding shares change?

Think of it like a pie getting sliced further or some slices being bought back by the chef (the company). When a company needs more money, it might decide to cut more slices and sell them, increasing the number of outstanding shares.

On the other hand, sometimes a company might decide to buy back some slices, reducing the number of outstanding shares. So, this number is never static; it’s always changing.

You may also like: Unlocking the power of preference shares

Types of outstanding shares

There are two types of outstanding shares as follows:

  1. 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, this number can change. If a company issues more shares or buys some back, it can affect your slice of the pie.

  1. 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 to find the number of shares outstanding?

Curious about how many shares a company has? Here are some quick ways to find out:

  1. Look at the company’s financial statements.
  2. Check the investor relations page on the company’s website.
  3. Scan the company’s SEC filings, if it’s a U.S. company.
  4. Use financial news websites like Yahoo Finance.
  5. Check stock exchange websites where the company is listed.

Why bother? Because knowing this number helps you make smarter investing decisions.

Practical example of an outstanding share

Let’s say a company, ABC Corp, has 1,000 shares out there, priced at Rs.100 each. Its total value? Rs.100,000. Now, ABC decides to buy back 100 of its shares, spending Rs.9,000.

Post-buyback, only 900 shares are left in the market. This can bump up the earnings for each remaining share and might even push the stock price up. Why?

Because it shows the company believes in its future and is willing to give back cash to investors, making it a potentially good pick for your portfolio.

Also Read: An essential guide to shares – types & significance

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:

  1. Market capitalization

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 capitalization would be $10 million.

  1. 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.

  1. Cash flow per share

This measures how much cash a company generates, again divided by the number of outstanding shares.

Infographic: How do outstanding shares affect financial metrics?

Financial MetricCalculation Method
Market CapitalizationOutstanding 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

Let’s find out when and why the number of outstanding shares change.

Stock Splits Explained

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 and mergers and acquisitions

You often hear about one company joining with another or buying it out completely, right? A merger is like two friends deciding to become a team, while an acquisition is like one friend taking full charge of the team. You might wonder, “What do outstanding shares have to do with this?

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.

Also Read: Why is everyone talking about equity shares: Essential features & benefits!

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.

So the next time you come across this term, you won’t have to scratch your head in confusion. Instead, you’ll know exactly what it means and why it’s important. Happy investing!

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Akanksha Jha

With extensive writing experience and years deep in the stock market and fintech sectors, I excel at transforming intricate financial concepts into clear, actionable insights. I'm dedicated to guiding readers on their financial paths with confidence and clarity.

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