The number of outstanding shares of common stock fluctuates frequently, increasing when companies issue additional shares to raise cash, initiate a stock split, or when employees exercise stock options. Total outstanding shares decrease if there is a reverse stock split or when a company buys back outstanding shares of its own stock. Let’s look at an example of the fluctuation of common stock. In May 2021, technology company Nvidia announced it would initiate a four-for-one stock split—its fifth split since the company went public in 1999—of its common stock. The board of directors decided this would make ownership more accessible to potential investors and employees. As a result, each Nvidia stockholder on record by June 21, 2021, received a dividend of three additional shares of common stock for every share held on the record date.
How Outstanding Shares Work
Public reports in which companies list the total outstanding shares include a quarterly or annual report or a balance sheet. These reports often can be found on a company’s investor relations page. Why does the total number of outstanding shares matter? For starters, a company’s market capitalization is determined by multiplying the current market price of one share of the corporation by the total number of outstanding shares. Market capitalization is used to compare company sizes, which helps investors evaluate risk and potential growth.
Types of Shares
Companies may issue different classes of shares, the most common being “common” or “ordinary shares.” The different types of shares denote different rights for the shareholder. For example, shares may come with or without the power to vote on board appointees and other corporate matters. Depending upon the class of share, a shareholder may or may not have the right to receive dividend payments or participate in capital distribution upon dissolution of the company. Other differences between shares include the following.
Outstanding Shares vs. Treasury Shares
While outstanding shares of stock are those that can be purchased or sold on the secondary market, treasury shares are those that are held by the company and are not available in the open market. The total number of issued shares is the sum of the outstanding shares and the treasury shares.
Outstanding Shares vs. Float
A stock’s total outstanding shares help determine its liquidity, or how rapidly shares of that stock can be bought or sold without substantially impacting the price. The number of shares a company has available to trade in the open market is known as its float. To determine a stock’s float, subtract the number of shares that are held by a single party (a company founder, for example) or small group from the total shares outstanding.
Basic and Diluted Shares
The total outstanding shares may be differentiated between basic and diluted shares. Basic shares are common shares available on the secondary market. Diluted shares are those with special classifications, such as preferred stock, stock options, or stock warrants. If a company reports diluted shares, it may indicate more shares will be added in the future.
Authorized Shares vs. Shares Outstanding
Authorized shares represent the maximum number of shares a company can issue. A company may authorize 5 million shares for an initial public offering, but only sell 4 million shares. The number of authorized shares is equal to or larger than the number of outstanding shares.
What It Means for Individual Investors
Knowing the number of outstanding shares a company has issued, as well as the types of shares, is all part of making smart investment decisions. Determining a company’s market capitalization and earnings per share are critical components of smart investors’ analysis process. To get there, you need to know the number of outstanding shares.
