Issued and outstanding shares are fundamental concepts in corporate finance representing the equity held by shareholders and owners.
Issued Shares
Issued shares refer to the total number of shares that a corporation has allotted and assigned to shareholders. These shares can be:
- Held by shareholders, including officers and insiders.
- Held in the corporation’s treasury (treasury shares).
Mathematically, if \(A\) represents the authorized shares, \(I\) the issued shares, and \(T\) the treasury shares, then:
where \(E\) represents the unissued shares.
Outstanding Shares
Outstanding shares are those that have been issued and are held by shareholders, excluding treasury shares. Thus:
where \(O\) is the outstanding shares.
Importance in Corporate Finance
- Capital Investment: Represents the capital that shareholders have invested in the firm.
- Earnings Per Share (EPS): Used to calculate EPS, an important indicator of company performance.
- Voting Rights: Reflect the number of shares that can vote in corporate decisions.
Types of Shares
Common Shares
These provide voting rights and dividends, representing a portion of ownership in the company.
Preferred Shares
These often do not provide voting rights but have a higher claim on assets and earnings, such as priority dividends.
Examples and Special Considerations
Example
Assume a corporate charter authorizes 1,000,000 shares. The firm decides to issue 600,000 shares, of which 50,000 are held as treasury shares. Here:
- Authorized Shares (\(A\)): 1,000,000
- Issued Shares (\(I\)): 600,000
- Treasury Shares (\(T\)): 50,000
- Outstanding Shares (\(O\)): \(600,000 - 50,000 = 550,000\)
Special Considerations
- Share Buybacks: Can decrease outstanding shares, potentially increasing share value.
- Dilution: Issuing more shares can dilute value and control for existing shareholders.
Historical Context
The concept of shares dates back to the Dutch East India Company (VOC), which issued the first stocks in the early 17th century, setting a precedent for modern corporate finance.
Applicability in Different Scenarios
- Initial Public Offering (IPO): Introduction of issued shares to public markets.
- Mergers and Acquisitions: Issued and outstanding shares are critical in valuation and negotiation.
- Dividends: Calculation based on the number of outstanding shares.
Comparisons and Related Terms
Authorized Shares
The maximum number of shares a corporation is allowed to issue as per its corporate charter.
Treasury Shares
Previously issued shares that were bought back by the issuing company.
FAQs
Q1: What is the difference between issued and outstanding shares?
Issued shares are those allotted to shareholders, while outstanding shares are issued shares minus treasury shares.
Q2: How do share buybacks affect outstanding shares?
Share buybacks reduce the number of outstanding shares, potentially increasing the value of remaining shares.
Q3: Why are issued and outstanding shares important for EPS calculation?
EPS is calculated by dividing net income by the number of outstanding shares, making it a key financial metric.
References
- “Introduction to Corporate Finance,” Richard A. Brealey, Stewart C. Myers, and Franklin Allen.
- “Principles of Corporate Finance,” Richard Brealey, Stewart Myers, and Franklin Allen.
Summary
Issued and outstanding shares are central to understanding a firm’s capital structure and shareholder equity. They impact various financial metrics, corporate governance, and market perceptions, playing crucial roles in valuations, corporate decisions, and investment strategies. Understanding their nuances is essential for anyone involved in corporate finance, investing, or financial analysis.
