Outstanding stock: Overview, definition, and example
What is outstanding stock?
Outstanding stock refers to the total number of shares that are currently owned by shareholders, including both public investors and insiders, such as company executives. These shares are actively traded on the market and are part of a company's total share capital. Outstanding stock does not include shares that are held in the company’s treasury or shares that have been repurchased by the company. The number of outstanding shares is a key indicator used to calculate important financial metrics, such as earnings per share (EPS) and market capitalization.
Outstanding stock is crucial for understanding a company’s equity structure and for determining shareholder rights, such as voting rights and dividend payments.
Why is outstanding stock important?
Outstanding stock is important because it provides insight into a company’s total market value and shareholder base. It determines the ownership distribution of the company and helps in calculating key financial ratios like earnings per share (EPS), which is used by investors to assess the company’s profitability on a per-share basis. Additionally, the number of outstanding shares is used to calculate the company's market capitalization, which is a common measure of the company’s size and value.
For businesses, the number of outstanding shares can be influenced by decisions such as stock splits, repurchases, or issuance of new shares. For investors, knowing the number of outstanding shares is crucial for evaluating their own stake in the company.
Understanding outstanding stock through an example
Let’s say a company, XYZ Corp., has issued a total of 1 million shares of stock. Out of these, 800,000 shares are held by public investors, while the remaining 200,000 shares are owned by company insiders. The 1 million shares, less any shares the company might have repurchased, would be considered the outstanding stock. If XYZ Corp. later repurchases 100,000 shares, the number of outstanding stock would drop to 900,000 shares.
In another example, a company might issue additional shares in a new stock offering, increasing the number of shares outstanding. If the company issues 500,000 new shares, the total number of outstanding shares would increase, which could potentially dilute the value of each share owned by existing shareholders.
An example of an "outstanding stock" clause
Here’s how an "outstanding stock" clause might appear in a corporate agreement or financial statement:
“As of the date of this Agreement, the Company has issued a total of 10 million shares of common stock, of which 8 million shares are outstanding and held by public shareholders. The remaining 2 million shares are held by the Company as treasury stock. The number of outstanding shares may change from time to time due to stock repurchases, issuance of new shares, or other corporate actions.”
Conclusion
Outstanding stock represents the total number of shares currently in circulation and owned by shareholders. It is a key metric for understanding a company’s market value, calculating earnings per share, and assessing ownership distribution. For companies, managing outstanding stock is important for equity structuring, investor relations, and market perception. For investors, knowing the number of outstanding shares is essential for understanding the potential value of their holdings and the financial performance of 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.