There are many situations in which the total number of outstanding shares is considered important. Shares are beholden to the same economic laws as anything else that can be bought or sold: price is determined by supply and demand. Thus, the value of each share is inversely related to the number of shares outstanding, with all other things being equal.
Like price, the percentage of company ownership expressed in each share is also reduced whenever more shares are created. You may also see outstanding shares used as a variable in financial ratios, making them important for fundamental analysis.
The total number of shares that can be issued is set when the corporation is formed. This number is referred to as authorized shares. Only a majority vote by the shareholders can increase or decrease the number of authorized shares. Often, a company does not issue all of its authorized shares at once. A company with 100,000 authorized shares at its initial public offering (IPO) can choose to release just 75,000 and hold the remaining 25,000 in its treasury. The shares released to the public are called outstanding shares. Not all outstanding shares are necessarily available to the public. Some shares are restricted, such as those awarded to executives. Outstanding shares that are not restricted comprise the company's floating stock.
Not only should shareholders be familiar with this stock market terminology, they should also understand under what circ*mstances the number of outstanding shares might fluctuate. Companies can choose to buy back shares from the public or offer options that give investors the right to purchase stock from the treasury.
When a company issues too many additional shares too quickly, existing shareholders can be hurt. Ownership levels can be diluted and share prices can drop. It can also imply a certain level of risk depending on the reasoning for issuing more shares. Knowing the number of shares outstanding, especially when compared to similar firms, can help you protect your investments.
