Loading the player...
A:

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 that 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.

outstanding.gif

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 and The Dangers of Stock Dilution.

RELATED FAQS
  1. What is the difference between weighted average shares outstanding and basic weighted ...

    Outstanding shares refers to stock that is currently held by investors, including shares held by the public, and restricted ... Read Answer >>
  2. Why would I need to know how many outstanding shares the shareholders have?

    Find out why shareholders should know how many outstanding shares have been issued by a corporation, and learn what happens ... Read Answer >>
  3. What is the difference between authorized shares and outstanding shares?

    Calculating financial ratios can help investors understand a company's financial position, but only when a knowledge of various ... Read Answer >>
  4. 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 ... Read Answer >>
  5. How can a company trade more shares in one day than there are shares outstanding? ...

    The number of shares traded in a single day can be greater than the number of a company's outstanding shares, but this is ... Read Answer >>
Related Articles
  1. Investing

    What are Issued Shares?

    Issued shares are the amount of authorized stocks a company’s shareholders buy and own. The annual report shows the number of outstanding shares.
  2. Investing

    The Basics Of Outstanding Shares And The Float

    We go over different types of shares and what investors need to know about them.
  3. Investing

    What's A Company’s Worth, And Who Determines Its Stock Price?

    A company’s worth is the same as its market capitalization. Market capitalization is stock price multiplied by number of outstanding shares.
  4. Managing Wealth

    Calculating Basic Earnings Per Share

    Basics earnings per share measures the amount of net income earned per share of outstanding stock.
  5. Investing

    Getting The Real Earnings

    EPS helps investors analyze earnings in relation to changes in new-share capital.
  6. Investing

    The Dangers of Share Dilution

    Investors need to be aware of dilutive securities and how they can affect existing shareholders.
  7. Investing

    The 5 Types Of Earnings Per Share

    A look at the five varieties of EPS and what each represents can help an investor determine whether a company is a good value, or not.
  8. Investing

    What Is The Difference Between Earnings-Per-Share And Dividends-Per-Share?

    Here's a brief explanation of the difference between earnings per share and dividends per share.
  9. Investing

    Assess Shareholder Wealth With EPS

    Find out if management is doing its job of creating profit for investors.
RELATED TERMS
  1. Outstanding Shares

    A company's stock currently held by all its shareholders, including ...
  2. Primary Earnings Per Share (EPS)

    One of two methods for categorizing shares outstanding. The other ...
  3. Fully Diluted Shares

    The total number of shares that would be outstanding if all possible ...
  4. Share Turnover

    A measure of stock liquidity calculated by dividing the total ...
  5. Interim Earnings Per Share

    A measure of earnings calculated at a specified time, shorter ...
  6. Value Change

    An adjustment made to a stock's price to reflect the number of ...
Hot Definitions
  1. Racketeering

    A fraudulent service built to serve a problem that wouldn't otherwise exist without the influence of the enterprise offering ...
  2. Aggregate Demand

    The total amount of goods and services demanded in the economy at a given overall price level and in a given time period.
  3. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  4. Blue Chip

    A blue chip is a nationally recognized, well-established, and financially sound company.
  5. Payback Period

    The length of time required to recover the cost of an investment. The payback period of a given investment or project is ...
  6. Collateral Value

    The estimated fair market value of an asset that is being used as loan collateral. Collateral value is determined by appraisal ...
Trading Center