Stock Investing 101 – Outstanding Shares

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Outstanding Shares

All shares that the company actually issued. Outstanding shares include the public float and all restricted shares. Treasury stock, however, are not included.

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Shares Outstanding

What Are Shares Outstanding?

Shares outstanding refer to a company’s stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders. Outstanding shares are shown on a company’s balance sheet under the heading “Capital Stock.” The number of outstanding shares is used in calculating key metrics such as a company’s market capitalization, as well as its earnings per share (EPS) and cash flow per share (CFPS). A company’s number of outstanding shares is not static and may fluctuate wildly over time.

Outstanding Shares

Understanding Shares Outstanding

Any authorized shares that are held by or sold to a corporation’s shareholders, exclusive of treasury stock which is held by the company itself, are known as outstanding shares. In other words, the number of shares outstanding represents the amount of stock on the open market, including shares held by institutional investors and restricted shares held by insiders and company officers.

A company’s outstanding shares can fluctuate for a number of reasons. The number will increase if the company issues additional shares. Companies typically issue shares when they raise capital through an equity financing, or upon exercising employee stock options (ESO) or other financial instruments. Outstanding shares will decrease if the company buys back its shares under a share repurchase program.

Key Takeaways

  • Shares outstanding refer to a company’s stock currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders.
  • A company’s number of shares outstanding is not static and may fluctuate wildly over time.

How to Locate the Number of Outstanding Shares

In addition to listing outstanding shares, or capital stock, on the company’s balance sheet, publicly traded companies are obligated to report the number of issued and outstanding shares and generally package this information within the investor relations sections of their websites, or on local stock exchange websites. In the United States, the figures for outstanding shares are accessible from the Securities and Exchange Commission (SEC) quarterly filings.

Stock Splits and Share Consolidation

The number of shares outstanding will increase if a company undertakes a stock split, or will reduce if it undertakes a reverse stock split. Stock splits are usually undertaken to bring the share price of a company within the buying range of retail investors; the increase in the number of outstanding shares also improves liquidity. Conversely, a company will generally embark on a reverse split or share consolidation to bring its share price into the minimum range necessary to satisfy exchange listing requirements. While the lower number of outstanding shares may hamper liquidity, it could also deter short sellers since it will be more difficult to borrow shares for short sales.

As an example, the online video streaming service Netflix, Inc. announced a seven-for-one stock split in 2020. In an attempt to increase the affordability of its stock and, concurrently, number of investors, Netflix increased its issuance of outstanding shares sevenfold, thus drastically reducing stock price.

Blue Chip Stocks

For a blue chip stock, the increased number of shares outstanding due to share splits over a period of decades accounts for the steady increase in its market capitalization and concomitant growth in investor portfolios. Of course, merely increasing the number of outstanding shares is no guarantee of success; the company has to deliver consistent earnings growth as well.

While outstanding shares are a determinant of a stock’s liquidity, the latter is largely dependent on its share float. A company may have 100 million shares outstanding, but if 95 million of these shares are held by insiders and institutions, the float of only five million may constrain the stock’s liquidity.

Share Repurchase Programs

Often times, if a company considers its stock to be undervalued, it will institute a repurchase program, buying back shares of its own stock. In an effort to increase the market value of remaining shares and elevate overall earnings per share, the company may reduce the number of shares outstanding by repurchasing, or buying back those shares, thus taking them off the open market.

Take, for example, Apple, Inc., whose outstanding securities have a large institutional ownership of about 62%. In March 2020, Apple announced a buyback program, several times since renewed, of upwards of $90 billion. According to the New York Times, the “primary purpose [of the repurchase] will be to eliminate the shareholder dilution that will occur from future Apple employee equity grants and stock purchase programs.” Due to its enormous cash reserves, Apple has been able to repurchase its stock aggressively, thus decreasing shares outstanding increasing its earnings per share.

As of December 2020, Apple’s market cap is $869.60 billion and it has 5.18 billion outstanding shares. The stock price is up nearly $170 since the buyback program was announced.

Conversely, in May 2020, BlackBerry, Ltd. announced a plan to repurchase 12 million of its own outstanding shares in an effort to increase stock earnings. BlackBerry plans to buy back 2.6% of its more than 500 million outstanding float shares as an increase in equity incentive. Unlike Apple, whose excessive cash flow allows the company to spend exorbitantly to bring in future earnings, BlackBerry’s dwindling growth suggests that its repurchase of outstanding shares comes in preparation for its cancellation.

Weighted Average of Outstanding Shares

Since the number of outstanding shares is incorporated into key calculations of financial metrics such as earnings per share and because this number is so subject to variation over time, the weighted average of outstanding shares is often used in its stead in certain formulae.

For example, say a company with 100,000 shares outstanding decides to perform a stock split, thus increasing the total amount of shares outstanding to 200,000. The company later reports earnings of $200,000. To calculate earnings per share for the overall inclusive time period, the formula would be as follows:

(Net Income – Dividends on Preferred Stock (200,000)) / Outstanding Shares (100,000 – 200,000)

But it remains unclear which of the two variant outstanding share values to incorporate into the equation: 100,000 or 200,000. The former would result in an EPS of $1, while the latter would result in an EPS of $2. In order to account for this inevitable variation, financial calculations can more accurately employ the weighted average of outstanding shares, which is figured as follows:

(Outstanding Shares x Reporting Period A) + (Outstanding Shares x Reporting Period B)

In the above example, if the reporting periods were each half of a year, the resulting weighted average of outstanding shares would be equal to 150,000. Thus, in revisiting the EPS calculation, $200,000 divided by the 150,000 weighted average of outstanding shares would equal $1.33 in earnings per share.

Shares Outstanding vs. Floating Stock

Floating stock is a narrower way of analyzing a company’s stock by shares. It excludes closely held shares, which are stock shares held by company insiders or controlling investors. These types of investors typically include officers, directors, and company foundations.

How Many Shares Should I Buy of a Stock?

You know which companies you want to invest in, but how many shares should you buy?

So, you’ve done some research and have decided on a stock you want to own, but don’t know how many shares you should buy in your brokerage account.

There are several factors that you should consider when trying to determine position size, which is the number of shares you’ll buy. One obvious factor is how much money you have to invest, but there are some others you should keep in mind as well. Here’s a quick rundown that can help you find the ideal number of shares you should buy using your desired investment amount, as well as a few other considerations that might apply to you.

Image source: Getty Images.

How to determine how many shares you can buy

If you already have a dollar amount in mind that you want to invest in a stock, determining how many shares you should buy is rather easy. Here’s the procedure:

  1. Look up the current price of one share by viewing a stock quote.
  2. Divide the dollar amount you wish to invest by the current share price.
  3. If your broker allows you to buy fractional shares (only a few do) this is how many shares you can afford. If you can’t buy fractional shares, round the result of the calculation down to the nearest whole number.

For example, let’s say that I want to invest in Walmart (NYSE: WMT) and that I have $1,000 in cash in my brokerage account. We’ll assume that I cannot buy fractional shares.

A quick glance at a quote shows me that Walmart is trading for just under $120 per share. Dividing $1,000 by $120 gives a result of 8.33. Rounding down tells me that I can buy eight shares of the stock.

Can you buy one share of stock?

Absolutely you can invest in just one share of a stock — and it has become far more practical to do so than it used to be. Now that most major brokers have done away with trading commissions, it is feasible for you to start investing with very little money.

If you use one of the few brokers that still charge commissions, the cost of trading should be taken into consideration when deciding if it’s practical to buy a certain number of shares. For example, let’s say that you want to invest in General Electric (NYSE: GE) stock, which trades for approximately $11 as of November 2020. If your broker charges a $6.99 trading commission and you buy 10 shares, you’re paying roughly 11% of the transaction cost in the form of commission. If you buy 100 shares, this drops to just over 1%. In other words, the more shares you buy, the less of an impact commissions will have.

On the other hand, if your broker doesn’t charge commissions, go ahead and buy as few or as many shares of a stock as you want. And if your broker does charge commissions, you may want to consider switching to a stock broker that doesn’t charge per transaction.

Is it possible to buy less than one share of a stock?

Some brokers have started to allow customers to buy fractional shares of stock.

This isn’t exactly a new concept. By enrolling stocks in dividend reinvestment, most major brokers have allowed customers to add fractional shares to their investments for some time. However, buying fractional shares as a stand-alone transaction is a relatively new concept.

Schwab is one example of a major broker that allows investors to buy stocks on a fractional basis, and there are several newer brokers that also allow this.

This is beneficial in two main ways.

  • First, investors who don’t have enough money to buy a full share of a stock can still invest if they can buy just a fraction of a share. For example, if you only have $500 to invest and want to buy Amazon stock (about $1,750 per share), you’re out of luck unless your broker allows fractional shares. If you can buy fractional shares, you can use your $500 to buy about 0.29 shares of Amazon stock right away.
  • Second, investors who buy more than one share can put all of their money to work. In our Walmart example, I would be able to buy 8.33 shares with my $1,000 if my broker allowed fractional share investing.

Other considerations

Two other considerations when determining the number of shares you should buy are diversification and the significance of 100-share lots.

  • Diversification — Just because you can afford a certain number of shares doesn’t mean that you should put all of your money in a single stock. As I mentioned, the absence of trading commissions makes it much more convenient to buy smaller positions, so keep this in mind when deciding if you’d be better off with a larger position in one stock or smaller positions in several.
  • 100-share lots — In stock trading, 100 shares is known as a “round lot.” Institutional traders tend to buy and sell in multiples of 100 and options are typically priced based on 100 shares per contract. If you have no idea what options trading is, you can safely ignore this section, but if you plan on using covered calls to generate income, you may want to buy in multiples of 100.

How many shares of stock should you buy?

There’s no one-size-fits-all answer to this question, but hopefully this has shed some light on the ideal number of shares to buy for you. To sum it up, investors should consider:

  • How much money you have available to invest
  • Commissions you’ll have to pay (if any)
  • The diversification of your portfolio

In the vast majority of situations, these three factors can help you answer the question of how many shares of a particular stock you should buy.

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