Understanding how to calculate outstanding shares for a public company would appear to be a simple matter. The definition of shares outstanding is almost self-evident.
But the concept of outstanding shares is a bit more complicated than it seems. The number of shares outstanding changes over time, sometimes dramatically, which can impact the calculation for a reporting period. At any given point, instruments like warrants and stock options must be accounted for as well. These minor nuances can have a big impact.
What Are Outstanding Shares?
Outstanding shares are the shares in the hands of the public, executives and employees. They are the number of shares actually owned by the company’s shareholders.
Again, it seems to be an extraordinarily simple definition that results in a fixed, easy-to-understand number. But as we shall see, that’s not necessarily the case.
Outstanding shares are one of three classifications of the share count. Issued shares refer to those shares issued by the company over time — yet, unlike outstanding shares, the number of issued shares includes shares repurchased by the company and held as treasury stock.
For many companies, however, even those executing buybacks, the number of outstanding shares and the number of issued shares is the same. Those companies buy back and retire shares, instead of holding them in the treasury. In this way, the number of both issued and outstanding shares is reduced.
Authorized shares, meanwhile, are the maximum number of shares a company can issue, based on its corporate charter.
The number of authorized shares rarely comes into play. For most companies, the number of authorized shares well exceeds the shares outstanding. In addition, most public companies don’t need to issue more shares, at least in the number required to bump up against the authorized maximum.
If a company is struggling and needs to sell stock to raise cash, management may want to issue shares beyond the authorized number. In that event, its shareholders usually will vote to amend the charter to increase the number of authorized shares. There has been one notable recent exception, however. AMC Entertainment (NYSE:AMC) created its preferred equity units (NYSE:APE) because its shareholders would not allow an increase in authorized shares of the common equity.
So how do we calculate outstanding shares? The simple answer is that the company itself does the work. Management knows how many shares have been issued; it knows how many shares have been repurchased, if any. Filings with the U.S. Securities Exchange Commission (for domestic companies, the 10-K annual report and the 10-Q quarterly reports) will have the specific number of shares outstanding on a specific date, as in this example from Apple (NASDAQ:AAPL):
But there’s a catch: the precise number of outstanding shares on a specific day doesn’t completely account for the actual ownership of a public company.
The reason for that is that most public companies have instruments that provide for shares to be issued in the future. These instruments include stock options, stock warrants, and convertible debt.
Those instruments can be “in the money” if the exercise price — the price designated for the stock by the option or warrant — is below the stock’s trading price. The same is true for convertible debt, which allows holders to either be repaid in cash or convert the debt into equity at a pre-set per-share price. And if these instruments are in the money, they represent current ownership of the company, even if technically the shares underlying the options, warrants or debt haven’t yet been issued.
To account for this ownership, with options and warrants companies use what is called the treasury stock method. Shares outstanding are added based on this formula:
Shares Underlying — (Shares Underlying * Exercise Price)
In other words, the treasury stock method accounts for the cash that will come in from option and warrant exercise, and assumes that the cash received will offset a portion of the shares issued.
A simplistic example may be instructive. Assume that Company A has 100 million shares outstanding and a trading price of $10. It also has 10 million stock options outstanding with an exercise price of $5.
Obviously, those option holders in theory could exercise their options to create new shares. Should they do so, however, they would also contribute $50 million in cash to the corporate treasury.
Assuming all option holders exercise, Company A would issue 10 million shares. With the $50 million in cash, in theory it could instantly repurchase 5 million shares at $10 each.
And so our calculation of outstanding shares looks like this:
100 million shares + 10 million shares underlying options — 5 million shares repurchased
for a share count of 105 million.
Options and warrants are one aspect of the difference between basic shares outstanding and diluted shares outstanding.
Basic shares outstanding represent the actual number of shares outstanding during a period. Diluted shares outstanding include “dilutive” securities that could add to the share count — including options, warrants, and convertible debt.
Option and warrant shares are added using the treasury stock method. Convertible debt is treated on an “as-converted” basis if the company’s stock is trading above the conversion price.
Here, too, an example should be helpful. Again, Company A has 100 million shares outstanding. Its basic share count is 100 million.
But the company, as in our example above and using the treasury stock method, has 5 million shares linked to options and warrants. Let’s assume the company also has $500 million in convertible debt with a conversion price of $5.
That debt must be treated on an “as-converted” basis. And so our company has a basic share count of 100 million — but a diluted share count of 205 million (100 million basic + 5 million options and warrants + 100 million in shares from the $500 million in convertible debt).
There is one potential pitfall here, however. One key goal of the diluted share figure is to appropriately calculate earnings per share accounting for all of the potential shares out there, whether currently existing or underlying other instruments. But there’s a problem if the company is operating at a loss.
For a loss-making company, the diluted share count will reduce loss per share, since the net loss is being spread over a larger amount of shares. Continuing our example, if Company A lost $100 million in the first quarter, its basic loss would be $1.00 per share ($100 million divided by 100 million basic shares) — but its diluted loss would be $0.49 per share ($100 million divided by 205 million diluted shares).
And so, for a loss-making company, potentially dilutive shares can be excluded if they are “anti-dilutive”. In other words, as in this example, those shares would not be counted if they improve results, which happens most frequently (though not invariably) when the company is not profitable.
This can on occasion lead to some wonky results. Whether potential shares are considered anti-dilutive depends on the period. Company A might post a loss in the first quarter, and report a diluted share count of 100 million — but post a profit for the year, with a diluted share count more than twice as high.
So far, we’ve focused on shares outstanding, whether basic or diluted, at a fixed point in time. But that’s not how the metric is treated in financial reporting. In SEC filings, companies will report the total number of shares outstanding on a given day, but in their quarterly and annual figures they must also offer the weighted average shares outstanding.
This is because the total number of outstanding shares will change over time. Stock options will be exercised; restricted stock may vest after executives hit certain targets. Stock might be sold to raise capital; convertible debt might move into, or out of, the money.
The weighted average shares outstanding figure smooths out this variance, by simply averaging the share count across the reporting period. This is a figure calculated by the company itself; investors literally do not have the access to the data required.
And companies will make that data rather easily available. The profit and loss statements in nearly every corporate earnings press release will include both basic and diluted shares outstanding. SEC filings as noted will include absolute share count on a specific day — but they will also include weighted average shares outstanding for the respective reporting periods (whether a single quarter, a full year, or multiple quarters).
Those filings will also include a discussion of anti-dilutive securities (sometimes referred to as “potentially dilutive” securities”), as seen in this report from Plug Power (NASDAQ:PLUG):
But public data sources are also useful for finding shares outstanding. Here at Investing.com it’s simple to find shares outstanding on the Income Statement, available under “Financials” for any stock. Here, for example, is the available information from the Tesla income statement (NASDAQ:TSLA):
The InvestingPro dashboard for TSLA offers even more detail:
In certain cases, notably for companies that are aggressively issuing shares or debt, public data should be augmented with a reading of SEC filings. But for mature companies with relatively little movement in share count (either basic or diluted), quarterly and annual data from public sources should easily suffice for solid fundamental analysis.
The float, also called the free float or the public float, represents the subset of shares outstanding that are actually available to trade.
Not all outstanding shares can be sold. After initial public offerings or SPAC (special purpose acquisition company) mergers, pre-existing owners usually have “lock-up” requirements that prohibit selling for a period of time (usually at least 90 days). Lockups aside, long-standing investors such as founders or venture capital backers may have their own restrictions on selling, or may have signaled that they have no intent to do so.
Float is more of a technical measure than a fundamental one. The float, for instance, has no bearing on market capitalization or earnings per share. But the supply of shares in the market can have a bearing on trading dynamics.
Most notably, short interest usually is measured as a percentage of the float, rather than shares outstanding. This is because short sellers, when choosing to cover, can only buy the shares actually in the float. And so in theory (and often in practice), highly-shorted stocks with a low float present ripe conditions for a so-called “short squeeze”.
In a stock split, the number of shares outstanding increases, since each existing share is “split”. In a 10-for-1 split, the number of shares outstanding expands ten times; in a 4-for-1 split, four times, and so on.
As the name suggests, the opposite effect occurs with a reverse stock split. (Remember that stock splits usually are done at least in part to lower the share price; reverse stock splits generally are meant to increase the share price, often to regain the $1 per share level required by major stock exchanges.) In a reverse stock split, existing shares are merged, for lack of a better term, reducing the number of shares outstanding. A 1-for-10 reverse stock split means the number of shares outstanding is one-tenth the original; a 1-for-4 reverse stock split means the total is one-fourth the pre-split level, and so on.