What Are Common Shares Outstanding?
Common shares outstanding represent the total number of a company's shares of equity that are currently held by all its shareholders, including institutional investors and individual investors. This figure is a crucial component within corporate finance, reflecting the portion of the company's stock that is actively circulating in the market and available for trading. Unlike authorized shares (the maximum number a company is allowed to issue) or issued shares (total shares ever distributed), common shares outstanding specifically refers to shares that are in the hands of investors, excluding those repurchased by the company and held as treasury stock. The number of common shares outstanding can fluctuate due to various corporate actions, such as new share issuances, stock buybacks, or stock splits.
History and Origin
The concept of shares, and by extension, common shares outstanding, has roots in the development of early business structures. The direct precursor to the modern corporation was the joint-stock company, which emerged in the early 17th century. These entities allowed multiple investors to pool their capital for large, often risky, ventures like overseas trade and exploration. By issuing shares to investors, these companies could raise significant funds, and investors could share in the profits while limiting their individual risk. Prominent examples include the English East India Company (established in 1600) and the Virginia Company, which was granted a charter by King James I in 1606 to establish settlements in the New World.8 This model enabled capital accumulation and risk-sharing, laying the groundwork for the evolution of modern corporate law and the widespread issuance of various types of shares, including common shares.
Key Takeaways
- Common shares outstanding refers to the total number of a company's shares held by investors, excluding treasury stock.
- This figure is essential for calculating key per-share metrics like earnings per share (EPS) and market capitalization.
- It provides insight into investor ownership and potential voting power in a public company.
- Corporate actions such as share repurchases or new issuances directly impact the number of common shares outstanding.
- The figure is routinely disclosed in a company's financial statements and regulatory filings.
Formula and Calculation
Common shares outstanding can be calculated by starting with the total number of issued shares and subtracting any shares that the company has repurchased and holds as treasury stock.
The formula is expressed as:
Where:
- Issued Shares: The total number of shares that a company has ever distributed to investors since its inception, including shares currently held by investors and those repurchased by the company.
- Treasury Stock: Shares that the company has bought back from the open market. These shares are no longer considered outstanding for purposes of voting rights or dividends.
Interpreting Common Shares Outstanding
The number of common shares outstanding is a fundamental data point for investors and analysts. A higher number of shares outstanding generally means that the ownership of the company is more dispersed, potentially leading to less concentrated control by any single shareholder. Conversely, a lower number can indicate more concentrated ownership.
Changes in common shares outstanding over time can signal different corporate strategies. An increase often results from a company issuing new shares to raise capital, which can dilute the ownership percentage of existing shareholders. A decrease, frequently due to share buybacks, can indicate that a company is returning capital to shareholders, potentially boosting per-share metrics, but also reducing the available float. Analysts often monitor this figure in conjunction with a company's overall capital structure to assess management's approach to financing and shareholder value.
Hypothetical Example
Consider "Alpha Corp," a hypothetical technology company. Initially, Alpha Corp had 100 million shares of common stock issued. Over time, the company decided to repurchase 10 million shares from the market as treasury stock to reduce dilution from employee stock options and enhance shareholder value.
To calculate Alpha Corp's common shares outstanding:
Issued Shares = 100,000,000
Treasury Stock = 10,000,000
Common Shares Outstanding = (100,000,000 - 10,000,000 = 90,000,000)
Therefore, Alpha Corp has 90 million common shares outstanding. This figure would be used for calculating metrics like its market capitalization and earnings per share.
Practical Applications
Common shares outstanding is a critical figure in various aspects of finance and investment analysis. Public companies are required by regulatory bodies, such as the U.S. Securities and Exchange Commission (SEC), to regularly report this figure in their financial statements. For instance, the number of shares outstanding for a company's common stock as of the latest practicable date is typically found on the cover page of its annual report, Form 10-K.6, 7 This filing, which provides a comprehensive summary of a company's financial performance, is a key source of information for investors.5
Investors use common shares outstanding to calculate a company's market capitalization, which is the total value of its outstanding shares, providing a snapshot of the company's size on the stock exchange. It is also a critical input for determining per-share metrics like earnings per share (EPS) and dividends per share. Furthermore, it informs voting power, as each common share typically grants one vote per shareholder in corporate matters. Companies also consider common shares outstanding when planning new share issuances, a process often undertaken to raise capital for expansion, debt reduction, or to incentivize employees.4
Limitations and Criticisms
While common shares outstanding is a fundamental metric, its interpretation requires careful consideration. The number itself does not inherently indicate a company's health or value. For example, a decrease in common shares outstanding due to significant share buybacks might seem positive as it can boost per-share metrics. However, critics argue that excessive buybacks, especially if debt-funded, can divert capital away from long-term investments in research and development, employee wages, or business expansion.2, 3 Some assert that such practices prioritize short-term stock price performance, potentially enriching executives with stock options at the expense of sustainable growth.1
Conversely, an increase in common shares outstanding due to new share issuance, while providing capital, can dilute existing shareholder ownership and voting power if not managed effectively. It is crucial to analyze the reasons behind changes in common shares outstanding, examining them within the broader context of a company's financial strategy, performance, and corporate governance practices.
Common Shares Outstanding vs. Treasury Stock
Common shares outstanding and treasury stock are two distinct but related concepts in a company's equity structure. Common shares outstanding refers to the total number of shares that have been issued by a company and are currently held by external investors. These shares have voting rights and are eligible for dividends. Treasury stock, on the other hand, represents shares that the company has previously issued but has since repurchased from the open market. These shares are held by the company itself, rather than by external shareholders. Consequently, treasury stock does not carry voting rights and does not receive dividends. The key point of confusion often arises because while treasury stock has been "issued," it is not "outstanding" as it is no longer in the hands of the public. The total number of shares issued by a company is the sum of common shares outstanding and treasury stock.
FAQs
How does common shares outstanding affect a company's market capitalization?
Common shares outstanding is a direct input in calculating a company's market capitalization. Market capitalization is determined by multiplying the current share price by the number of common shares outstanding. An increase in common shares outstanding, assuming the share price remains constant, will increase market capitalization, and vice versa.
Where can I find a company's common shares outstanding?
For public companies, common shares outstanding can typically be found on the cover page of their annual Form 10-K filing with the SEC. It is also usually available in the shareholders' equity section of the balance sheet or in the notes to the financial statements.
Does common shares outstanding include preferred stock?
No, common shares outstanding specifically refers to common stock. Preferred stock is a separate class of shares with different rights and characteristics, typically not included in the common shares outstanding count.
Can the number of common shares outstanding change?
Yes, the number of common shares outstanding can change. It increases when a company issues new shares, for example, through a secondary offering or an Initial Public Offering (IPO). It decreases when a company repurchases its own shares (treasury stock buybacks) or through reverse stock splits.