Outstanding Shares

As investors, it is important to have a solid understanding of the various terms and concepts commonly used in the stock market, outstanding shares being one important aspect. But what exactly is the meaning of outstanding shares, and why are they important? Let us find out in this guide.

What are Outstanding Shares?

Outstanding shares refer to the total number of shares a company has issued and its shareholders hold. This includes shares held by institutional investors, such as mutual funds or pension funds and restricted shares owned by the company’s officers and insiders. Essentially, these shares represent the ownership stake in the company that is publicly available and held by investors.

This metric is crucial for investors and analysts as it helps determine a company’s market value and influences various financial ratios, such as earnings per share (EPS) and market capitalisation. Understanding the concept of these shares is essential for assessing a company’s overall ownership structure and evaluating its investment potential.

How Does Outstanding Shares Work?

Outstanding shares play a significant role in reflecting a company’s equity actively traded in the market, encompassing various aspects such as voting rights and dividends. When a company issues shares, they become available for purchase by investors, increasing the total number of outstanding shares.

These shares represent ownership in the company and grant shareholders the right to vote on important company matters, such as board elections and major decisions. Furthermore, they also impact the distribution of dividends. Dividends are typically paid out to shareholders based on the number of outstanding shares they possess, meaning that the more shares one holds, the larger their dividend payout may be.

Types of Outstanding Shares

Authorised shares refer to the maximum number of shares a company can issue as stated in its corporate charter. This number can be adjusted through shareholder approval. Authorised shares give the company flexibility in raising capital or issuing stock options in the future.

Issued shares are the number of shares sold or allocated by the company to shareholders. These shares represent the ownership stake investors hold and are typically used in calculating ownership percentages and voting rights.

Restricted shares are issued shares that have certain limitations or restrictions placed on them. These restrictions can include a lock-up period, during which the shares cannot be sold for a specific period of time, or certain conditions that need to be met before they can be fully owned by the shareholder. Restricted shares are often used as employee incentives or as part of merger and acquisition deals.

Treasury shares, on the other hand, are shares that were once issued and have been repurchased by the company. These shares are no longer considered outstanding and do not have voting rights or receive dividends. The company can reissue or retire Treasury shares depending on its financial strategies.

How to Calculate the Outstanding Shares?

You need to subtract the treasury shares from the issued shares to calculate the outstanding shares. Treasury shares refer to the shares that a company has bought back from the open market or acquired through other means and are held by the company itself. These shares are not considered outstanding and do not have any voting rights or receive dividends.

In the Indian market, there are some nuances to consider when calculating outstanding shares. One important aspect is understanding the regulations and guidelines set by the Securities and Exchange Board of India (SEBI) regarding treasury shares. SEBI has specific rules on acquiring and utilising treasury shares, and companies must comply with these regulations when calculating these shares.

Outstanding Shares Formula

Calculating the number of outstanding shares is straightforward and provides valuable information about a company’s ownership structure. The basic outstanding shares formula involves subtracting the treasury shares, which are held by the company itself, from the total number of issued shares. This formula highlights the number of shares in the hands of external investors eligible for voting rights and dividends.

However, be aware of potential variations in calculating these shares based on company reports. Some companies may have complex capital structures, such as multiple classes of shares with different rights and restrictions. In these cases, it becomes necessary to carefully analyse the company’s financial statements and disclosures to accurately determine their number.

Benefits of Outstanding Shares

Understanding the concept of outstanding shares can offer significant benefits for investors. One key advantage is gaining insights into a company’s size. By knowing their number, investors can gauge the company’s market capitalisation and better understand its position in the market.

This information can help investors make informed decisions and assess the potential for stock appreciation.

Furthermore, understanding them allows investors to evaluate a company’s dividend prospects. Dividends are typically paid out based on the number of outstanding shares, so knowing this figure can provide insights into the potential dividend yield. Investors seeking income from their investments can use this information to assess the attractiveness of a company’s dividend policy.

How Do You Find the Number of Shares Outstanding?

Investors can explore several avenues to determine the number of outstanding shares of a company.

  • One approach is to refer to the company’s quarterly and annual reports. These reports often disclose important financial information, including the total number of outstanding shares. By reviewing these reports, investors can obtain accurate and up-to-date company share count information.

  • Another option is to use stock market analysis websites. These online platforms provide information about publicly traded companies, including details about these shares.

  • Besides, investors can directly inquire about the company’s investor relations department. This can be done through email, phone, or by accessing the investor relations section on the company’s official website.

How do Outstanding Shares Determine the Market Capitalisation of a Company?

Outstanding shares play a crucial role in determining a company’s market capitalisation. This metric is calculated by multiplying the number of these shares by the current share price. It represents the total market value of a company, and investors use it to gauge its size and financial standing in the market.

The number of outstanding shares represents the total number of shares owned by shareholders, including institutional investors, retail investors, and company insiders. By multiplying this figure by the current share price, investors can arrive at market capitalization, which reflects the collective perception of a company’s value in the stock market.

How do Stock Splits Affect Outstanding Shares?

When a company decides to conduct a stock split, it can directly impact the number of outstanding shares. A stock split is a decision made by a company’s board of directors to increase the number of shares outstanding without changing the overall market capitalization. It is typically done by dividing existing shares into multiple shares in a specific ratio.

For example, in a 2-for-1 stock split, each existing share is split into two new shares. As a result, the number of these shares doubles, but the individual share price is halved. This means that while the number of shares owned by each shareholder increases, the overall value of their investment remains the same.

Difference Between Outstanding Shares and Treasury Shares

Outstanding shares refer to the total number of shares of a company’s stock that shareholders currently hold. These shares are actively traded on the stock market and represent the company’s ownership stakes. The company issues them and can be held by individuals, institutional investors, or other companies.

Additionally Read: Debtors Turnover Ratio

On the other hand, treasury shares are different. These shares were once outstanding but have been repurchased by the issuing company. Once repurchased, treasury shares are no longer considered outstanding and are not eligible for dividend payments or voting rights. Instead, they are held by the company itself and kept in its treasury stock.

Treasury shares may be repurchased for various reasons, such as to support stock buyback programs, maintain control over the company, or use them for employee stock compensation plans.

Feature Outstanding Shares Treasury Shares
Definition

Total number of shares currently held by all shareholders.

Shares that were issued but later bought back by the company and held in its own treasury.

Impact on Market Cap

Directly influences the company’s market capitalisation.

Do not count towards market capitalisation as they are not considered in circulation.

Voting Rights

Shareholders have voting rights in company decisions.

Do not carry voting rights as they are held by the company itself.

Dividend Eligibility

Eligible for dividends.

Not eligible for dividends as they are not in active circulation.

Public Availability

Available to be bought and sold on the open market.

Not available for public trading until reissued.

Conclusion

By clearly understanding outstanding shares and how they can impact a company’s stock price and ownership structure, investors can make more informed decisions about their investments. Always stay informed and educated on the intricacies of the stock market to make the most of your investments.



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