A share, also known as stock, is a unit of ownership in a company. Shares outstanding refers to the number of shares of a corporation's stock that are being held by investors, whether they are company officials, corporate insiders or members of the public. The number of shares outstanding, also known as stock outstanding or, perhaps most commonly, outstanding shares, is an important metric that affects many things, including the price of the company's stocks.
When a public corporation is formed, it agrees upon the total number of shares that it can issue. This number is its authorized shares. Once this value is identified upon going public, it can later be adjusted, but only by a vote of the company's shareholders.
A privately-held company does not have company shares that are owned by the public — all ownership of the company is internal. Some companies decide to go public, however, and this is usually for the purpose of raising capital. By going public, the company sells some of its shares to members of the public. When a corporation decides to issue public shares, however, it doesn't have to, and typically does not, issue its entire number of authorized shares. Some amount of shares are kept internally.
The first time a company issues stock is called an initial public offering (IPO). Whether it's the first time the shares are offered to the public or well after the company first went public, those shares are offered to the public at large via the stock market. Prospective investors, however, typically employ an investment bank to secure those public shares.
Officers and other insiders in a corporation can receive shares of stock as compensation. These restricted shares are not allowed to be sold on the market, though that restriction can be lifted under certain conditions. Officers and insiders may sell their shares back to the company or they can sell them to the public via the stock market after being registered through the government agency that oversees the market.
Restricted shares are included in the company's number of total shares outstanding. The number of nonrestricted shares outstanding is called the float and represents the number of shares available for trade on the market. If a corporation itself buys back shares of its own stock, those shares are no longer included as outstanding shares.
The number of shares outstanding consists of two types of shares — preferred shares and common shares. Owners of preferred shares typically do not have voting rights within the corporation, and they receive a fixed dividend before any dividends are paid to common stock shareholders. Owners of common shares typically have voting rights and are entitled to a portion of the company's profits after the preferred dividends are paid. If the company fails, preferred shareholders have priority over common shareholders in the payment of dividends, on assets or on the proceeds from the liquidation of assets.
The number of stock outstanding multiplied by the price of the share represents a corporation's market capitalization. Investors use this number to determine the size of companies, which can then be put into categories such as large cap, mid cap and small cap companies. Different entities use different dollar values to define each category, and some use more than three categories of sizes. Investors typically see larger companies as being more stable, and they often see smaller companies as being more volatile and more risky but with a greater potential for profit.
Another metric calculated using shares outstanding is earnings per share, which is the corporation's net income, minus dividends on preferred stocks, divided by the weighted average shares outstanding. Earnings per share is calculated for a particular period of time, usually one year or a quarter of a year. Investors consider earnings per share to be the most important indicator of a company's profitability, and earnings per share has the greatest effect of any metric on the price of the stock. A low-priced stock that has high earnings per share will be considered a good investment and will be in high demand, which in turn will drive up the price of the stock.