Outstanding securities: Overview, definition, and example
What are outstanding securities?
Outstanding securities refer to the total number of securities (such as stocks, bonds, or other financial instruments) that have been issued by a company and are currently held by investors, including both institutional investors and individuals. These securities are considered “outstanding” because they are actively in circulation and have not been repurchased or canceled by the company. For example, outstanding shares of stock represent the total shares that shareholders own and that are available for trading on the market.
The number of outstanding securities is important because it represents the market capitalization of a company (in the case of shares) and affects key financial metrics such as earnings per share (EPS), dividend distribution, and voting rights for shareholders. Companies may issue new securities or buy back outstanding securities, which can impact the total number of securities in circulation.
Why are outstanding securities important?
Outstanding securities are important because they reflect the actual ownership or financial obligations of a company at any given time. For investors, understanding the number of outstanding securities helps to assess the company’s market value and the potential dilution of their investments if new securities are issued. The number of outstanding shares, for example, directly impacts the company’s market capitalization, which is used to assess the size and value of the company in the stock market.
Outstanding securities are also relevant for corporate governance. Shareholders with outstanding shares typically have the right to vote on company matters, such as electing the board of directors. The number of outstanding shares influences the weight of an individual shareholder's vote.
Understanding outstanding securities through an example
Imagine a company, Company A, has issued a total of 1 million shares of stock. These shares represent the outstanding securities of the company, meaning that 1 million shares are in circulation, held by investors. If an investor holds 100,000 shares, they own 10% of the company’s outstanding shares and have a corresponding 10% say in shareholder votes, such as the election of the board.
In another example, a company may decide to buy back some of its outstanding securities. If Company A repurchases 200,000 of its own shares from the open market, the total number of outstanding shares would decrease from 1 million to 800,000. This could increase the value of the remaining shares and reduce the company's earnings per share (EPS) dilution.
An example of outstanding securities clause
Here’s how an outstanding securities clause might appear in a corporate agreement:
“As of the date of this Agreement, the Company has issued and outstanding [X] shares of common stock. The total number of outstanding securities shall be updated in the event of any new issuance, buyback, or conversion of securities.”
Conclusion
Outstanding securities represent the total number of financial instruments, such as shares or bonds, that a company has issued and that are currently held by investors. These securities are crucial for determining the company’s market capitalization, financial metrics, and shareholder rights. Understanding the number of outstanding securities is important for investors, as it helps assess the value of their investments, the potential for dilution, and their voting power within the company.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.