The amount of shares outstanding in a company will often change due to a company issuing new shares, repurchasing and retiring existing shares, and other financial instruments such as employee options being converted into shares.
The weighted average of outstanding shares is a calculation that incorporates any changes in the amount of outstanding shares over a reporting period. It is an important number, as it is used to calculate key financial measures such as earnings per share (EPS) for the time period.
Let's look at an example:
Say a company has 100,000 shares outstanding at the start of the year. Halfway through the year, it issues an additional 100,000 shares, so the total amount of shares outstanding increases to 200,000. If at the end of the year the company reports earnings of $200,000, which amount of shares should be used to calculate EPS: 100,000 or 200,000? If the 200,000 shares were used, the EPS would be $1, and if 100,000 shares were used, the EPS would be $2  this is quite a large range!
This potentially large range is the reason why a weighted average is used, as it ensures that financial calculations will be as accurate as possible in the event the amount of a company's shares changes over time. The weighted average number of shares is calculated by taking the number of outstanding shares and multiplying the portion of the reporting period those shares covered, doing this for each portion and, finally, summing the total. The weighted average number of outstanding shares in our example would be 150,000 shares.
The earnings per share calculation for the year would then be calculated as earnings divided by the weighted average number of shares ($200,000/150,000), which is equal to $1.33 per share.
To read more, see The Basics Of Outstanding Shares And The Float.
RELATED FAQS

How do I use Excel to calculate a weighted average?
Learn about the calculation and interpretation of weighted averages, including how to compute a weighted average using Microsoft ... 
What Book Value Of Equity Per Share (BVPS) ratio indicates a buy signal?
Find out more about book value of equity per share, what BVPS measures and how to determine what level of BVPS indicates ... 
What does an unfavorable variance indicate to management?
Learn what an unfavorable variance indicates to management, such as problems with meeting expense and revenue targets or ... 
Is there a way to include intangible assets in booktomarket ratio calculations?
Find out more about the booktomarket ratio and how to calculate a public company's booktomarket ratio including its intangible ...

Strike Width
The difference between the strike price of an option and the ... 
Inverse Transaction
A transaction that can cancel out a forward contract that has ... 
Reference Equity
The underlying equity that an investor is seeking price movement ... 
Boundary Conditions
The maximum and minimum values used to indicate where the price ... 
DeltaGamma Hedging
An options hedging strategy that combines a delta hedge and a ... 
Gamma Hedging
An options hedging strategy designed to reduce or eliminate the ...