'Shares Outstanding' is explained in detail and with examples in the Corporate Finance edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.
The Shares Outstanding refers to the quantity of shares in a given company’s stock which are presently owned by all of the shareholders in total. This also includes the larger share blocks owned by the institutional investors. It also encompasses the company officers’ and insider shares which are restricted ones. Every corporate balance sheet will display this number under the category title of “Capital Stock.”
This key company metric is utilized in determining such important attributes of a publically traded company as their market capitalization, their CFPS cash flow per share, and their EPS earnings per share. The number of shares for a particular firm is never static, but in fact can range significantly over the years. The concept is also referred to as outstanding shares.
The only type of company shares that are not a part of this Shares Outstanding figure are the treasury stock which the company holds itself. Corporate share numbers can and do change for a variety of reasons. When firms choose to float additional shares, this raises the total numbers. They often do this in an effort to raise fresh capital via equity financing or as employees choose to exercise their employee stock option benefits. It is also possible for total number of outstanding shares to decrease over time. This especially occurs when corporations buy back their own shares from the open market using a share repurchase program. These rebought shares then become additional treasury stock for the firm.
Corporations are required by the SEC Securities and Exchange Commission to make publically available the numbers off both outstanding and issued shares. This information will not only be included in the annual reports and company balance sheets, but also in the corporate websites under the sub pages of investor relations. They can also be determined from the stock exchange websites as well. This information is similarly contained within the quarterly filings with the SEC.
When companies engage in a 2 for 1 stock share split, this will double the total number of Shares Outstanding. Similarly, this total number will be reduced by half if they should engage in a reverse stock split of a 1 for 2 shares consolidation. The main reason a corporation would be interested in this mathematical trick with the share prices is because they want to reduce the company share price to an easier buying price range for smaller-pocketed individual investors. It will similarly boost the liquidity when they do so.
A company might also decide to consolidate their shares if their company share price has taken a severe hit. This will double the share price and restore it to what is often times an exchange-mandated minimum price range so that it meets the ongoing listing requirements. It might harm the stock’s overall liquidity in the process, but it will likely discourage short sellers’ targeting the issue since it makes it considerably harder for them to borrow shares for the physical short sales.
It always helps to consider a real-world example to demystify confusing concepts like this. In June of 2015, NFLX Netflix, Inc. revealed that they would engage in a seven for one stock split. The idea was to reduce the stock price drastically so as to make it more affordable. This would also increase the numbers of investors in the stock issue, they hoped. They did manage to increase the numbers of shares by a full seven-fold and cut the underlying price per share to one-seventh of its prior levels in the process.
With Blue Chip Stocks, increasing the number of Shares Outstanding generally boosts the value of the stock and the overall market capitalization of the issue as well. Because these larger and more successful companies tend to deliver success in the form of greater earnings and higher dividend payouts over the years, their prices which reduce in the wake of the stock split tend to float gradually back to where they were before the split.
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