Outstanding Shares

Definition

Outstanding shares refer to the total number of shares of a company's stock that are currently owned by shareholders, including institutional investors and company insiders. These shares are important as they are used to calculate various financial metrics, such as earnings per share (EPS), and help determine the company’s market capitalization. Outstanding shares also play a crucial role in ownership structure and influence voting rights in corporate decisions.

5 Must Know Facts For Your Next Test

1. Outstanding shares can change over time due to stock buybacks, new issuances, or employee stock option exercises.
2. The calculation of EPS is crucial for investors as it helps assess a company's profitability relative to its outstanding shares.
3. Investors often pay attention to changes in outstanding shares as it can impact stock valuation and market perception.
4. A higher number of outstanding shares can dilute existing shareholders' equity, which affects their voting power and dividends.
5. Outstanding shares are not the same as authorized shares, which is the maximum number of shares a company can issue as defined in its corporate charter.

Review Questions

• How do outstanding shares affect a company's earnings per share (EPS) calculation and why is this important for investors?
  • Outstanding shares directly impact the calculation of earnings per share (EPS) because EPS is determined by dividing net income by the number of outstanding shares. A lower number of outstanding shares results in a higher EPS, which is an essential indicator of a company's profitability. Investors closely monitor EPS as it influences their perception of the company's performance and growth potential, ultimately impacting investment decisions.
• Discuss the implications of changes in outstanding shares on shareholder equity and voting rights within a corporation.
  • Changes in outstanding shares can significantly affect shareholder equity and voting rights. When new shares are issued, existing shareholders may experience dilution of their ownership percentage, meaning their claim on assets and earnings decreases. This dilution can also reduce their voting power in corporate matters. Conversely, if a company buys back its own shares, it can increase the value of existing shares and strengthen shareholder control by concentrating ownership among fewer shareholders.
• Evaluate how understanding outstanding shares can help investors make informed decisions about stock valuation and corporate actions.
  • Understanding outstanding shares allows investors to better evaluate stock valuation metrics such as market capitalization and EPS. By analyzing changes in outstanding shares due to corporate actions like stock buybacks or new issuances, investors can gauge how these moves might influence share price and overall market perception. This knowledge helps investors anticipate potential impacts on their investments, enabling them to make more informed decisions regarding buying, holding, or selling stocks based on the company's financial strategies and market dynamics.

Related terms

Market Capitalization: The total market value of a company's outstanding shares, calculated by multiplying the share price by the number of outstanding shares.

Earnings Per Share (EPS): A financial metric that indicates the profitability of a company, calculated by dividing net income by the number of outstanding shares.

Diluted Shares: The total number of outstanding shares that includes all potential shares from convertible securities like options, warrants, or convertible debt.