What are 'Outstanding Shares'
Outstanding shares refer to a company's stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders. Outstanding shares are shown on a company’s balance sheet under the heading “Capital Stock.” The number of outstanding shares is used in calculating key metrics such as a company’s market capitalization, as well as its earnings per share (EPS) and cash flow per share (CFPS).
A company's number of outstanding shares is not static, but may fluctuate widely over time. Also known as “shares outstanding.”
BREAKING DOWN 'Outstanding Shares'
Any authorized shares that are held by or sold to a corporation’s shareholders, exclusive of treasury stock which is held by the company itself, are known as the outstanding shares. In other words, the number of shares outstanding represents the amount of stock on the open market, including shares held by institutional investors and restricted shares held by insiders and company officers.
A company’s outstanding shares can fluctuate for a number of reasons. The number will increase if the company issues additional shares. Companies typically issue shares when they raise capital through an equity financing, or upon exercising employee stock options or other financial instruments. Outstanding shares will decrease if the company buys back its shares under a share repurchase program.
How to Locate the Number of Outstanding Shares
In addition to listing outstanding shares, or capital stock, on the company’s balance sheet, publicly traded companies are obligated to report the number of issued and outstanding shares, and generally package this information within the investor relations sections of their websites, or on local stock exchange websites. In the United States, outstanding shares numbers are accessible from the Securities and Exchange Commission (SEC) quarterly filings.
Stock Splits and Share Consolidation
The number of shares outstanding will double if a company undertakes a 2-for-1 stock split, or will be halved if it undertakes a 1-for-2 share consolidation. Stock splits are usually undertaken to bring the share price of a company within the buying range of retail investors; the doubling in the number of outstanding shares also improves liquidity. Conversely, a company will generally embark on a share consolidation to bring its share price into the minimum range necessary to satisfy exchange listing requirements. While the lower number of outstanding shares may hamper liquidity, it could also deter short sellers since it will be more difficult to borrow shares for short sales.
As an example, the online video streaming service Netflix, Inc. (NFLX) announced a seven-for-one stock split in June of 2015. In an attempt to increase the affordability of its stock and, concurrently, number of investors, Netflix will increase its issuance of outstanding shares sevenfold, thus drastically reducing stock price.
Blue Chip Stocks
For a blue chip stock, the increased number of shares outstanding due to share splits over a period of decades accounts for the steady increase in its market capitalization, and concomitant growth in investor portfolios. Of course, merely increasing the number of outstanding shares is no guarantee of success; the company has to deliver consistent earnings growth as well.
While outstanding shares are a determinant of a stock’s liquidity, the latter is largely dependent on its share float. A company may have 100 million shares outstanding, but if 95 million of these shares are held by insiders and institutions, the float of only 5 million may constrain the stock’s liquidity.
Share Repurchase Programs
Often times, if a company considers its stock to be undervalued, it will institute a repurchase program, buying back shares of its own stock. In an effort to increase the market value of remaining shares and elevate overall earnings per share, the company may reduce the number of shares outstanding by repurchasing, or buying back those shares, thus taking them off the open market.
Take, for example, Apple, Inc. (AAPL), whose outstanding securities have a large institutional ownership of about 62%. In March 2012, Apple announced a buyback program, several times since renewed, of upwards of $90 billion. According to the New York Times, the “primary purpose [of the repurchase] will be to eliminate the shareholder dilution that will occur from future Apple employee equity grants and stock purchase programs.” Due to its enormous cash reserves, Apple has been able to repurchase its stock aggressively, thus decreasing shares outstanding by around 11% to date and increasing its earnings per share by six percentage points.
As of July 2015, Apple’s market cap is $721.40 billion and it has 5.76 billion outstanding shares. The stock price is up nearly $49 since the buyback program was announced. In its most recent earnings statement, the company reported 32.70% year-over-year quarterly earnings growth.
Conversely, in May 2015, BlackBerry, Ltd. (BBRY) announced a plan to repurchase 12 million of its own outstanding shares in an effort to increase stock earnings. BlackBerry plans to buy back 2.6% of its more than 500 million outstanding float shares as an increase in equity incentive. Unlike Apple, whose excessive cash flow allows the company to spend exorbitantly now to bring in future earnings, BlackBerry’s dwindling growth suggests that its repurchasing of outstanding shares comes in preparation for its cancellation.
Weighted Average of Outstanding Shares
Since the number of outstanding shares is incorporated into key calculations of financial metrics such as earnings per share, and because this number is so subject to variation over time, the weighted average of outstanding shares is often used in its stead in certain formulae.
For example, say a company with 100,000 shares outstanding decides to perform a stock split, thus increasing the total amount of shares outstanding to 200,000. The company later reports earnings of $200,000. To calculate earnings per share for the overall inclusive time period, the formula would be as follows:
(Net Income - Dividends on Preferred Stock (200,000)) / Outstanding Shares (100,000-200,000)
But it remains unclear which of the two variant outstanding share values to incorporate into the equation: 100,000 or 200,000. The former would result in an EPS of $1, while the latter would result in an EPS of $2. In order to account for this inevitable variation, financial calculations can more accurately employ the weighted average of outstanding shares, which is figured as follows:
(Outstanding Shares * Reporting Period A) + (Outstanding Shares * Reporting Period B)
In the above example, if the reporting periods were each half of a year, the resulting weighted average of outstanding shares would be equal to 150,000. Thus, in revisiting the EPS calculation, $200,000 divided by the 150,000 weighted average of outstanding shares would equal $1.33 in earnings per share.
To learn more about this significant but basic terminology, read: Basics of Outstanding Shares and The Float.