Outstanding shares represent the ownership stakes of different investors in the company. Understanding them is crucial for investors as it provides information about a company's ownership structure and financial health. Furthermore, by knowing how many shares are owned by shareholders, investors can assess the company's market value and its growth potential. Let us understand outstanding shares’ meaning, how they can change, and explore their various types.
What are outstanding shares?
Outstanding shares refer to the total number of shares (can be both equity and preference) of a company that are currently held by shareholders, such as:
- Institutional investors
- Company insiders, and the
- General public
Outstanding shares are actively traded on the share market. Each outstanding share represents a portion of ownership in the company and shareholders who own them are entitled to several rights, such as:
- They can vote at shareholder meetings
- They can get dividends
For example,
Let us say a company has 10 lakh outstanding shares, and you own 1 lakh shares. Now, this means:
- You effectively own 10% of the company
- You have a proportional claim on the company's assets and earnings
Outstanding shares are different from authorised shares
Some investors use the terms outstanding shares and authorised shares interchangeably. However, both differ in meaning and have stark differences.
- Authorised shares are the highest number of shares a company can legally issue based on its articles of incorporation.
- This number is set by the company at the time of its incorporation.
- It can be amended later through shareholder approval if necessary.
When a company issues the whole or a part of authorised shares, they become outstanding shares as they are now held by investors and represent their proof of ownership in the company.
What are the different types of outstanding shares?
There are two common types of outstanding shares: equity shares and preference shares. Let us understand them:
Equity shares
- Also known as common shares or ordinary shares, these represent ownership in a company.
- They entitle shareholders to voting rights at shareholder meetings.
- Also, equity shareholders participate in corporate decisions such as:
- The election of the board of directors, and
- Approval of major corporate actions
- Equity shareholders receive dividends, but the amount varies depending on:
- The company's profitability, and
- Dividend policy
- Dividends for equity shares are usually paid out after obligations to preference shareholders have been fulfilled.
- Similarly, in the event of liquidation, equity shareholders are paid after the claims of the following have been met:
- Preference shareholders
- Debt holders, and
- Other creditors.
Preference shares
- These shares have certain preferences or priority rights over equity shares concerning:
- Dividends, and
- Repayment of capital at the time of liquidation.
- Preferred shareholders receive fixed dividends at regular intervals.
- These dividends must be paid out before any dividends can be distributed to equity shareholders.
- However, preference shares often do not have voting rights.
How do convertible securities affect outstanding shares?
It is common for companies to issue convertible securities as a means of:
- Raising capital, or
- Providing incentives to investors and employees.
These securities, such as convertible debentures/ bonds or preference shares, come with the option to convert them into a predetermined number of common shares following a specified conversion ratio. This conversion option bifurcates the outstanding shares into:
- Basic shares outstanding, and
- Dilutes shares outstanding
Let us understand both individually.
What are basic shares outstanding?
These represent the total number of shares of a company's stock that shareholders currently hold. It is a straightforward count of:
- Shares issued, and
- Outstanding in the market
What are diluted shares outstanding?
Diluted shares outstanding take into account all potential shares that could be outstanding if all convertible securities were converted into equity shares. These potential shares are referred to as dilutive securities. That’s because their conversion dilutes the ownership stake of existing shareholders.
Let us see how dilution impacts outstanding shares:
Stock options |
Convertible securities |
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Can the number of outstanding shares change
Yes, the number of outstanding shares of a company can change over time due to various factors. Let us study some of the major ones:
Stock splits
- In a stock split, a company divides or splits its current shares into several shares.
- For example:
- Say a company decides on a 3-for-1 stock split
- This means each existing share is split into three shares
- While the total value of the shares remains the same, the number of outstanding shares increases
- This is a way for companies to:
- Make their stock more affordable, and
- Increase liquidity
Stock dividends (bonus shares)
- Companies distribute additional or bonus shares to their existing shareholders in proportion to their current holdings.
- This increases the total number of outstanding shares.
- Stock dividends are issued as a reward to shareholders.
Share repurchases (buyback)
- Companies may repurchase or buy back their shares from the open market.
- This reduces the number of outstanding shares.
- Share repurchases are usually done to:
- Return capital to shareholders, and
- Offset the dilution caused by:
- Employee stock options or
- Convertible securities
How to find the number of shares outstanding?
There are several ways to determine the number of shares outstanding for a publicly traded company:
- Company financial statements: The number of shares outstanding is typically disclosed in the financial statements of a company, such as the balance sheet or the income statement.
- Investor relations websites: Most companies maintain an investor relations section on their website, which provides various financial details, including the number of shares outstanding.
- Regulatory filings: Publicly traded companies must submit regular reports to regulatory bodies like the Securities and Exchange Commission (SEC), which include data on the number of shares outstanding.
- Financial news websites: Websites such as Yahoo Finance or Google Finance offer real-time information on a company's outstanding shares.
- Stock exchange websites: Information on shares outstanding is also available on the websites of the stock exchanges where the company’s shares are listed.
Given the importance of the number of shares outstanding in calculating various financial ratios and metrics, it is crucial for investors to know where to find this information.
Practical example
Imagine DEF Ltd has 2,000 outstanding shares of common stock. The stock is trading at Rs.50 per share, resulting in a market capitalisation of Rs.100,000.
DEF Ltd decides to initiate a share buyback programme to repurchase 200 shares of its stock. The company uses its cash reserves to fund the buyback.
Over the next few weeks, DEF Ltd purchases 200 shares on the open market at an average price of Rs.45 per share, spending a total of Rs.9,000.
Once the buyback is completed, the company has reduced its number of outstanding shares to 1,800. This reduction increases the earnings per share (EPS) for existing shareholders, as the company's profits are now distributed among fewer shares. Additionally, the share buyback signals to the market that DEF Ltd is confident in its future growth and has surplus cash to return to shareholders, which may enhance investor confidence and positively influence the stock price over time.
Conclusion
Outstanding shares represent the total number of shares held by shareholders. They indicate an ownership stake in the company and provide several rights, such as voting rights and dividend entitlements. Commonly, we can divide outstanding shares into equity and preference shares, with each having its obligations and rights.
Do you wish to know more about shares and debentures? Learn the key differences today.
