Companies issue shares, which represent a part-ownership of its operations. These are financial instruments that provide companies with a source of external equity finance. Usually, companies issue shares to the general public through a specific process. Once they do so, these shares still get traded in the market. However, companies do not receive any finance from it.

Usually, issuing shares requires companies to authorize them first. This process happens when the company gets incorporated. Once authorized, companies can make those shares available to the public. However, there is a limit for how many shares a company may issue. This limit depends on the shares that companies initially authorize when incorporated.

If companies have enough available authorized shares, they can issue them to the general public or existing shareholders. However, investors must purchase those shares for the company to receive finance. Depending on the demand for a company’s shares, this process may take a short or long time. Once done, these shares become a part of its shares outstanding.

What is Shares Outstanding?

Shares outstanding is a term used to describe a company’s authorized, issued and purchased shares. Usually, these include the number of total shares that a company’s shareholders hold or own. In other words, shares outstanding is the number of shares currently in circulation for a particular company. This number differs from the company’s authorized and issued shares.

Usually, the number of issued shares and outstanding shares are the same. However, companies may sometimes issue shares, but shareholders may not purchase them on time. In these circumstances, the number of issued and outstanding shares will differ. Apart from that, there are some other cases in which both numbers will vary. Other than those situations, both numbers will represent the number of a company’s shares currently in circulation.

In some circumstances, companies will also hold treasury shares. These are shares issued by a company but later repurchased from shareholders. In these cases, the number of outstanding shares will not match the number of issued shares. Therefore, distinguishing treasury shares from shares outstanding is crucial. If companies hold these shares, shares outstanding will represent the total issued shares minus the treasury stock.

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Usually, a company’s shares outstanding will be lower than its authorized shares. For more established companies, both numbers will be the same. However, some large companies can also increase their authorized shares. In general, a company’s authorized shares represent the total outstanding shares that it can have after issuing all its shares.

Overall, shares outstanding is a metric used to calculate a company’s number of shares in circulation. It differs from other shares-related numbers, for example, issued, authorized and purchased shares. Several factors may affect this number. The number of shares outstanding is a crucial metric for various calculations.

How does Shares Outstanding work?

When companies issue shares, these shares become available for purchase. As mentioned, companies may offer them to existing shareholders or new investors. Either way, it will increase the company’s issued shares count. Companies also need to have a margin between authorized shares and currently issued shares to make new issues.

Once shareholders purchase the issued shares, these shares become a part of a company’s shares outstanding. This number represents the total authorized, issued and purchased shares that are currently in circulation. However, this number may differ from the authorized and issued shares. Similarly, the purchased shares may also vary from outstanding shares due to treasury stock.

Investors can calculate this figure as either basic or fully diluted outstanding shares. For the basic shares outstanding, the number will include the current number of shares. This number helps companies calculate dividend distributions and voting in the general meeting of shareholders. However, basic shares outstanding does not provide information about hybrid instruments.

Instead, investors can use the fully diluted shares outstanding to get better information about a company’s shares outstanding. These outstanding shares number includes diluting securities, for example, convertibles and warrants. The fully diluted outstanding shares provide a view of what shareholders can expect this number to be in the future due to hybrid instruments.

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Shares outstanding is a highly critical figure for companies. It can help investors derive their total market capitalization. Similarly, it can provide information about potential future share issues through the fully diluted numbers. However, these do not include stock repurchased by the company, known as treasury stock. Most companies report their outstanding shares in their financial statements.

How to calculate Shares Outstanding?

As mentioned, shares outstanding is a highly crucial metric for metrics. Most companies provide this number in their financial statements. For public companies, this requirement may come from accounting standards. Similarly, it may arise from the jurisdiction in which companies operate. Sometimes, however, it may not be available in a company’s financial statements.

Similarly, companies may also have other stock, for example, preferred and treasury stock which may impact this figure. Therefore, it may be crucial for investors to calculate shares outstanding. This process involves various steps, depending on the company and its financial statements. In most circumstances, investors can use the following formula to calculate a company’s shares outstanding.

Shares Outstanding = Issued Stock – Treasury Stock

In the above equation, stock refers to a company’s common and preferred stock. Therefore, investors must sum both figures to calculate the metrics required for the above formula. Usually, the information for both of these is available in a company’s balance sheet. Therefore, investors can obtain these from their financial statements.

For a company with common and preferred stocks, the calculation will become complex. Investors can use the following formula to calculate its issued stock for the above equation.

Issued Stock = Issued common stock + Issued preferred stock

Similarly, the treasury stock formula will be as below.

Treasury Stock = Treasury common stock + Treasury preferred stock

Example

An investor wants to invest in a company, ABC Co. The company has a total issued common stock of 10 million. Similarly, its issued preferred stock is 1 million. ABC Co. also repurchased some stock in the previous accounting period. These include 2 million shares, which are a part of the company’s treasury stock. These shares include common stock. ABC Co. does not have any treasury preferred stock.

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ABC Co. does not present its shares outstanding in its financial statements. Therefore, the investor must measure it. Before calculating ABC Co.’s shares outstanding, the investors must calculate its issued stock. They can measure the amount using the following issued stock formula.

Issued Stock = Issued common stock + Issued preferred stock

Issued Stock = 10 million + 1 million

Issued Stock = 11 million

Once calculated, the investor can calculate ABC Co.’s shares outstanding. The company does not have different types of treasury stock. Therefore, the calculation for the treasury stock is not necessary. Instead, the investor can calculate the shares outstanding using the available information. They can do so using the following shares outstanding formula.

Shares Outstanding = Issued Stock – Treasury Stock

Shares Outstanding = 11 million – 2 million

Shares Outstanding = 9 million

In most cases, the shares outstanding will be similar to the issued stock. However, since ABC Co. has repurchased shares in the past, it has a treasury stock. This stock affects the company’s shares outstanding. Therefore, the calculation for the figure becomes crucial. Once calculated, the investor can use the metric in further analysis.

Conclusion

Companies have an authorized shares limit from which they can issue shares. Once allotted, shareholders buy these shares to provide a company with finance. Shares outstanding represents the total number of a company’s shares that is in circulation. Usually, investors can calculate it as the difference between issued stock and any treasury stock.