What does outstanding shares mean

Company A is a leading retail company that sells wristwatches. With the IPO, the company has issued 25, shares, has offered 2, shares to each of the two managing partners, and has retained 5, stocks in the treasury. Alex wants to calculate the market cap of the company and the earnings per share. The term "float" refers to the number of shares available to be traded by the public and excludes any shares held by company executives or the company's treasury.

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Investing Best Accounts. Stock Market Basics. Stock Market. Industries to Invest In. Getting Started. Planning for Retirement. The term outstanding shares means the total amount of company stock that is currently owned by the corporation's stockholders.

This can include restricted shares and share blocks. When an investment bank establishes the initial public offering IPO of a company, the bank will set a specific number of outstanding shares. Outstanding shares can be increased several ways.

First, there could be a secondary stock market offering. Second, the corporation may decide to give stock options to its employees as a form of payment.

The owners of outstanding shares have the right to receive dividends and also have voting rights in the corporation. Outstanding shares are an important part of calculating metrics for a corporation. In addition to market capitalization, outstanding shares can be used to calculate cash flow and earnings per share. You should be aware, however, that if you attempt to calculate earnings per share using outstanding share, your gains may be inflated.

Of those authorized shares, generally, around eight to nine million shares might be issued to the founders, with an additional one to two million shares reserved for the employee stock option pool. One reason the preferred approach is to authorize millions of shares for issuance at the outset is that it provides a startup with the flexibility to issue smaller percentages to employees, advisors and contractors without having to deal with issuing fractional shares, since often an employee, for example, may only receive a tiny fractional percentage ownership typically, less than 1 percent of a startup.

The remaining authorized but unissued shares are available in the event a corporation needs to issue more shares. These additional authorized shares, held in reserve, give a corporation some flexibility in the event that it depletes the initial amount of shares reserved for the employee stock option pool and needs to increase the pool when hiring a new employee, co-founder or executive.

If a startup does not have a cushion of authorized shares beyond the number of already issued shares, it would first need to deal with the administrative burden of obtaining required board and stockholder approvals to increase the number of authorized shares of common stock, and then would need to file a charter amendment in its state of incorporation.

See our article about how shares are issued to founders.