Shares outstanding

Definition: The total number of shares of common stock of a corporation that are held by its directors, executives, employees, and the investing public.

Example: PBL Corporation has granted 50,000 shares of its stock to its directors, 250,000 shares to its executives and employees, and 3,000,000 shares to the public. Adding them up, we get 3,300,000 shares outstanding.

Investeach explains: The number of shares outstanding is extremely important because it lets you know the number of shares over which a company’s profits must be spread. Some companies are able to make enormous profits, but they have so many shares outstanding that the profit per each share, formally known as earnings per share, or EPS, doesn’t amount to much.

A company can decrease its common shares outstanding by purchasing some of them from the public. This appears to create an odd situation: the company owning itself. However, this is not the case. The shares that are bought back, called Treasury Stock, are considered out of circulation. They lose the rights normally belonging to them.

Companies can increase the number of shares outstanding by re-selling shares of Treasury Stock or by issuing new shares to the public. Interestingly, there is no real limit on the number of shares a company can issue. What keeps companies from continuing to issue new shares and accumulating more and more cash are its current shareholders. Each time new shares are issued, the percentage that they own drops. This watering down of their ownership is called dilution. Because shareholders don’t take kindly to suffering dilution, companies rarely issue new shares and when they do it is for good reason. One such reason is to obtain more cash to buy out a competitor.

Most companies issue only common stock but some also issue preferred stock. Preferred stock is very different than common stock and when we refer to shares outstanding, we mean only the number of common shares outstanding.

Riddle me this:

1. Identify some of the usual holders of a company’s common stock.
2. How do companies decrease the number of their common shares outstanding?
3. How do companies increase the number of their common shares outstanding?
4. What do we call shares of common stock that have been bought back by the company?
5. What causes companies to issue new shares very rarely?
6. Identify a second type of stock that some companies issue.

Also known as: Outstanding shares