Financial lingo is very important for anybody interested or invested in products like stocks, bonds or mutual funds. Many of the financial ratios used in fundamental analysis include things like outstanding shares and the float. Let's go through these terms so that next time you come across them, you will know their significance.

Restricted and Float
When you look a little closer at the quotes for a company, you may see some obscure terms that you've never encountered. For instance, restricted shares refer to a company's issued stock that cannot be bought or sold without special permission by the SEC. Often, this type of stock is given to insiders as part of their salaries or as additional benefits. Another term you may encounter is "float." This refers to a company's shares that are freely bought and sold without restrictions by the public. Denoting the greatest proportion of stocks trading on the exchanges, the float consists of regular shares that many of us will hear or read about in the news.

Authorized Shares
Authorized shares refer to the largest number of shares that a single corporation can issue. The number of authorized shares per company is assessed at the company's creation and can only be increased or decreased through shareholders' vote. If at the time of incorporation the documents state that 100 shares are authorized, then only 100 shares can be issued.

But just because a company can issue a certain number of shares doesn't mean it will issue all of them to the public. Typically companies will, for many reasons, keep a portion of the shares in their own treasury. For example, company XYZ may decide to maintain a controlling interest within the treasury just to ward off any hostile takeover bids. On the other hand, the company may have shares handy in case it wants to sell them for excess cash (rather than borrowing). This tendency of a company to reserve some of its authorized shares leads us to the next important and related term: outstanding shares.

Outstanding Shares
Not to be confused with authorized shares, outstanding shares refer to the number of stocks that a company actually has issued. This number represents all the shares that can be bought and sold by the public, as well as all the restricted shares that require special permission before being transacted. As we already explained, shares that can be freely bought and sold by public investors are called the float. This value changes depending on whether the company wishes to repurchase shares from the market or sell out more of its authorized shares from within its treasury.

Let's look back at our company XYZ. From the previous example, we know that this company has 1,000 authorized shares. If it offered 300 shares in an IPO, gave 150 to the executives and retained 550 in the treasury, then the number of shares outstanding would be 450 shares (300 float shares + 150 restricted shares). If after a couple years XYZ was doing extremely well and wanted to buy back 100 shares from the market, the number of outstanding shares would fall to 350, the number of treasury shares would increase to 650 and the float would fall to 200 shares since the buyback was done through the market (300 – 100).

Hold on a minute, though - this is not the only way the number of outstanding shares can fluctuate. In addition to the stocks they issue to investors and executives, many companies offer stock options and warrants. These are instruments that give the holder a right to purchase more stock from the company's treasury. Every time one of these instruments is activated, the float and shares outstanding increase while the number of treasury stocks decrease. For example, suppose XYZ issues 100 warrants. If all these warrants are activated, then XYZ will have to sell 100 shares from its treasury to the warrant holders. Thus, by following the most recent example, where the number of outstanding shares is 350 and treasury shares total 650, exercising all the warrants would change the numbers to 450 and 550, respectively, and the float would increase to 300. This effect is known as dilution.

The Bottom Line
Because the difference between the number of authorized and outstanding shares can be so large, it's important that you realize what they are and which figures the company is using. Different ratios may use the basic number of outstanding shares while others may use the diluted version. This can affect the numbers significantly and possibly change your attitude toward a particular investment. Furthermore, by identifying the number of restricted shares versus the number of shares in the float, investors can gauge the level of ownership and autonomy that insiders have within the company. All these scenarios are important for investors to understand before they make a decision to buy or sell.

Related Articles
  1. Stock Analysis

    3 Reasons Why Applied Materials, Inc. is Poised for Growth (AMAT)

    Read why Applied Materials may be poised for growth after shares lost substantial value in the wake of a failed merger with a Japanese competitor.
  2. Stock Analysis

    VMware: Virtualization and the Hybrid Cloud

    Read about VMware, an information technology service provide and cloud computing company, and learn about its core products and services.
  3. Investing Basics

    Impact of Share Repurchases

    Share repurchases can have a significant positive impact on an investor’s portfolio and are a great way to build investor wealth over time.
  4. Investing Basics

    Don't Take Dividends For Granted

    Companies have been paying dividends to their shareholders since the 1600s and have given investors good reason to hold onto their shares for long time periods. For many investors, dividends ...
  5. Investing Basics

    A Peek Into Shareholder Meetings

    Shareholder meetings can be glamorous, exciting or controversial, but not particularly revelational. Here's a quick look at what to expect.
  6. Bonds & Fixed Income

    Introduction To Convertible Preferred Shares

    These securities offer an answer for investors who want the profit potential of stocks but not the risk.
  7. Options & Futures

    The Two Sides Of Dual-Class Shares

    Find out how dual-class shares can affect a company's performance.
  8. Term

    Understanding Market Price and Its Changes

    An asset’s or service’s market price is the current price at which it can be bought and sold.
  9. Options & Futures

    What Does Quadruple Witching Mean?

    In a financial context, quadruple witching refers to the day on which contracts for stock index futures, index options, and single stock futures expire.
  10. Professionals

    Is A Stockbroker Career For You?

    Becoming a stockbroker requires a broad skill set and the willingness to put in long hours. But the rewards can be enormous.
  1. Can an investor buy leveraged ETFs that track the automotive sector?

    As of 2015, no leveraged exchange-traded funds, or ETFs, track the automotive sector. However, a non-leveraged ETF tracks ... Read Full Answer >>
  2. If a company offers a buyback of its shares, how do I decide whether to accept the ...

    Tender offers for share buybacks are often made at a premium to the current market price; it may be in an investor’s best ... Read Full Answer >>
  3. Is Book Value Of Equity Per Share (BVPS) a good metric for long-term value investing?

    Book value of equity per share, or BVPS, also known as net asset value per share or simply equity per share, estimates the ... Read Full Answer >>
  4. How does a company decide when it is going to split its stock?

    There are no set guidelines or requirements that determine when a company will split its stock. Often, companies that see ... Read Full Answer >>
  5. How effective is a poison pill defense against a hostile takeover?

    Poison pills can be effective against hostile takeovers depending on the strategy used by the target company and the persistence ... Read Full Answer >>
  6. What do states do with unclaimed property?

    Unclaimed property refers to personal accounts in financial institutions or companies that have had no activity and whose ... Read Full Answer >>
Hot Definitions
  1. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  2. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  3. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  4. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  5. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  6. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
Trading Center