If you want to understand how to make money trading stocks, it’s critical to understand the different kinds of shares that companies make available. Calculating the number of outstanding shares a company has can help you to understand what proportion of a company’s stock is held by its shareholders. This, in turn, tells you which investors hold the largest numbers of shares, and therefore have the most influence at shareholder meetings. This number is also used to calculate several key financial metrics, so it’s important to understand how to calculate outstanding shares.
You can calculate outstanding shares by:
- Finding the company’s total number of preferred stock, common stock outstanding, and treasury stock.
- Add the number of preferred stock and common stock outstanding, then subtract the number of treasury shares from that total.
- Alternatively, you can calculate the weighted average of outstanding shares.
If you’re a market beginner, learning the ins and outs of stocks will help you get started trading, and making money. Read on to learn how to calculate outstanding shares so you can begin mastering the market.
What are Outstanding Shares?
First, you’ll need to understand what outstanding shares are. There are a number of different types of stocks that companies issue.
- are stock issued by corporations.
- are owned by shareholders, rather than by corporations.
- do not include treasury stock.
- are different than authorized shares.
Outstanding shares of stock is the kind of stock issued by the company that is owned by investors, rather than by corporations themselves.
At any moment in time, a corporation has a specific number of shares that it has authorized for sale, to individual or institutional investors. This number can fluctuate quickly over time. Outstanding shares are the total number of common stocks owned by investors.
It’s important to note that outstanding shares do not include treasury stock, which are shares that were once owned by investors that a corporation has repurchased. They also do not include preferred shares, which are stocks that do not carry shareholder voting rights, but do give their owners some ownership rights and pay a fixed dividend.
Finally, outstanding shares are different than authorized shares, or the number of shares that a corporation is legally allowed to issue. Outstanding stocks are the shares that are actually already out on the market.
Read on to learn how to calculate outstanding shares.
1. Check the Company’s Balance Sheet
Start by checking the company’s balance sheet. The balance sheet is a financial statement issued by the company that provides a full accounting of the company’s assets, liabilities, and shareholder’s equity at a particular moment in time. In other words, the balance sheet is a snapshot of what a company owns, what it owes, and the total amount that has been invested by shareholders.
The balance sheet is one of the key documents that investors use to evaluate a company, so it’s important to become familiar with it.
Companies that have publicly traded stocks in the United States are required to file public financial disclosures to the Securities and Exchange Commission (SEC) which include the company’s balance sheet. You can also find the company’s balance sheet in its annual report, which can often be found on the company’s website.
Once you’ve located a company’s balance sheet through the SEC or on the company’s website, look at the shareholders’ equity section, found near the bottom of the balance sheet.
Some companies’ balance sheets list the common shares outstanding straight out. If that’s the case, congratulations, you don’t need to do any calculations. But usually you will need to pull several numbers from the balance sheet in order to calculate the total outstanding shares formula.
2. Look at the Preferred Stock Line Item
Once you’ve located the company’s balance sheet, find the line item for preferred stock.
Preferred stock is a special class of shares that is generally considered a hybrid instrument, including properties of both a debt and equity instrument. Preferred stocks are higher ranking than common stock, but also subordinate to bonds in terms of claim, or rights to their share of the company’s assets.
Once you locate the line item for preferred stock, take note of the total number of preferred shares outstanding.
3. Look at the Common Stock Line Item
Next, you’ll want to look for the common stock line item on the company’s balance sheet. Common stock is the main class of stock that the company issues to investors. It is a security that represents ownership in a corporation. Investors who hold common stock exercise control by being able to vote on corporate policy and electing the company’s board of directors.
On the balance sheet, there is a line item description that states the number of shares outstanding. Take a note of this number too.
4. Look at the Treasury Stock Line Item
The next step is to find the treasury stock line item on the company’s balance sheet. This refers to how many total shares the company has purchased back from investors. More specifically, treasury shares are the portion of shares that a company keeps in its treasury.
If the company has not bought back shares from investors and does not have treasury shares, this line item won’t show up on the balance sheet. Once you’ve located the number of treasury stocks, write it down for your calculations.
5. Add the Preferred and Common Stock, Then Subtract the Treasury Shares
Once you have collected the total number of preferred shares, common shares outstanding, and treasury shares, you’re ready to do your calculation.
This step is relatively straight-forward: simply add together the total number of preferred shares and common shares outstanding, then subtract the number of treasury shares from that total. And voila, this gives you the number of total shares outstanding.
To take an easy example: say a company you’re researching has issued a total of 600 preferred shares and 400 common shares. The balance sheet also indicates that the company keeps 200 shares in its treasury. The total shares outstanding is calculated like this: 600 + 400, then subtract 200. The total number of outstanding shares is 800.
6. Calculate the Weighted Average of Outstanding Shares
As we’ve already seen, the number of a company’s outstanding shares can vary over time, sometimes fluctuating a great deal. A company could issue new shares, buy back shares, retire existing shares, or even convert employee options into shares.
Since the number of outstanding shares is an important component of a number of financial metrics, some analysts prefer to take a weighted average of outstanding shares instead of just capturing the total number of outstanding shares at a given moment in time. Instead, the weighted average incorporates changes in the number of outstanding shares over a certain period of time.
To calculate the weighted average of outstanding shares, multiply the number of outstanding shares per period by the proportion of the total time covered by each period. This gives you the number of weighted shares for each period. Then, add those terms together to get the weighted average number of outstanding shares.
For example, let’s say you want to calculate the weighted average number of outstanding shares for a company over two reporting periods of 6 months each. In the first 6-month reporting period, the company has 100,000 shares outstanding. In the second 6-month period, the company’s number of shares outstanding is 150,000.
(shares outstanding * proportion of period A) + (shares outstanding * proportion of period B) = weighted average of outstanding shares
During the first period, the company’s weighted shares outstanding is 100,000 * 0.5, or 50,000. In the second period, multiply 150,000 shares times 0.5, to get 75,000 outstanding shares. Finally, add 50,000 and 75,000, for a weighted average of 125,000 outstanding shares.
7. Start Using the Outstanding Shares Calculation to Make Money
Once you know how to calculate the outstanding shares, you can use this number to calculate a number of valuation metrics, or measures of a company’s performance and future earnings potential.
For example, you can calculate a company’s earnings per share (EPS), a common metric used to compare companies’ performances. You can find a company’s earnings per share by dividing the company’s profit by its outstanding shares of common stock.