Understanding the difference between weighted average shares and shares outstanding is vital for investors trying to build portfolios that will perform according to their expectations. These two calculations provide information on how well a company performs over time.
Outstanding shares refers to stock that is currently held by investors. It also includes shares held by the general public and restricted shares that are owned by company officers and insiders. The number of outstanding shares changes if the company issues new shares, repurchases existing shares, or if employee options are converted into shares.
Weighted Average Number of Shares
The weighted average shares outstanding, or the weighted average of outstanding shares, is a calculation that takes into consideration any changes in the number of outstanding shares over a specific reporting period. Investors, when investing for the long term, often compile a position in a stock over several years.
Stock prices change daily and keeping track of the cost basis of shares accumulated over many years is desirable. If an investor wants to calculate a weighted average of the price paid for the shares, they must multiply the number of shares acquired at each price by that price, add those values, and then divide the total value by the total number of shares.
In general, the weighted average is a mean value calculated by averaging each quantity against an assigned weighting to determine the relative importance of each quantity.
The weighted average number of shares is determined by taking the number of outstanding shares and multiplying it by the percentage of the reporting period for which that number applies for each period. In other words, the formula takes the number of shares outstanding during each month weighted by the number of months that those shares were outstanding.
Weighted Average Cost Per Share
Investors may choose to use weighted averages if they have compiled a position in a particular stock over a period. Given continuously changing stock prices, the investor will calculate a weighted average of the share price paid for the shares.
To calculate the weighted average cost per share, the investor can multiply the number of shares acquired at each price by that price, add those values, and then divide the total value by the total number of shares.
Weighted averages may also be used in other aspects of finance including calculating portfolio returns, inventory accounting, and valuation.
Weighted Average Shares Outstanding
The weighted average shares outstanding figure is used to calculate key financial metrics such as earnings per share (EPS). Management and financial analysts focus on EPS because it represents the profit left over from operations that is available to stockholders. Basic EPS, for example, is calculated as follows:
Basic EPS=Weighted Average Shares Outstanding(Net Income−Preferred Dividends)where:EPS=Earnings per share
Basic EPS = Basic Weighted Average Shares
Basic weighted average shares, on the other hand, represents the above-mentioned weighted average shares outstanding less the dilution of stock options for a specific period. For basic weighted average shares, "basic" essentially means non-dilutive.
Dilution occurs when a company issues additional shares that reduce an existing investor's proportional ownership in the company. Using diluted shares is more informative than using basic shares because if securities are converted into shares of common stock—in other words, dilution occurs—an investor's stake in the company, or their share of the total pie, shrinks.
Companies that have simple capital structures only need to report basic EPS. Those with complex structures (those that have potential dilutive securities) must report both basic EPS and diluted EPS.