A company issues shares of stock to raise money. In this section we will explain what outstanding stock is and how you can figure out how much outstanding stock a company has.
Definition of Outstanding Stock
Outstanding stock refers to the stock that is owned by the public stockholders of a company. There may be more stock available than is held by stockholders, either because the company has reacquired it or because it is still for sale. But what exactly is stock, anyway?
When a company wishes to raise capital, it can do so in many ways. One way is through allowing members of the public to buy little pieces of the company. These little pieces of the company are called stock and are usually referred to as shares, because owning them means that you own a 'share' of the company. For example, if you own stock in XYZ Company, you could say that you own a certain number of shares in XYZ Company, depending on how many shares of stock you bought.
Authorized and Issued Stock
So how does all this work? First, a company that wants to offer stock for sale must decide how much money it wants to raise, and how much of the company it wants to offer for sale to the public in order to raise that money. This will determine the maximum number of shares of stock it would like to authorize. It will include this information in its charter or articles of incorporation.
A company will rarely sell all of the shares it authorizes because it will usually want to hold some stock back to offer to employees, to use for raising money later, to maintain a controlling interest in the company, or for other reasons. Remember, each share represents a piece of ownership in the company. If I decide to split my company into 1,000 pieces, and then I sell all 1,000 pieces, I might not own my company anymore. So, the company will keep some of the shares and then issue the remaining shares for sale. So in the last example, instead of issuing all 1,000 shares for sale, I might only issue 400 shares of stock for sale, and I would keep the remaining 600 authorized shares of stock.
Figure 1. Relationship of Authorized Stock to Issued Stock to Outstanding Stock
Once I issue stock, I wait for people to buy it. All the stock that gets bought by the public is called the outstanding stock. For example, if all of the 400 shares of stock that I issued in the last example were bought by the public, I would have 400 shares of stock outstanding. But what if only 240 of the shares get sold? Then I only have 240 stock shares outstanding. The remaining 160 shares are issued and waiting to be bought.
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Think of it like a shoe store. Some stores don't put all the boxes of shoes out at once. They keep a bunch of boxes of shoes in the back. All the boxes of shoes that they have, both on the floor available for sale and in the back stockroom are like authorized stock. It's everything they could sell. The boxes of shoes that are out front and available for sale are like the issued stock. They are the items the company is willing to sell or offering for sale. Finally, and all the shoes that have been bought are like the outstanding shares. They are what the company has sold.
Treasury Stock and Outstanding Stock
If a company decides to buy back some of that stock, which then becomes treasury stock, then the number of shares of stock outstanding will decrease. So, say I sold all 400 shares but then I realized that I needed to buy 50 shares back because I am hiring a new CEO and I promised her more stock than I have available to give her. Once I buy back those 50 shares, my outstanding stock falls from 400 shares to 350 shares, because only 350 shares are now owned by the public. The 50 shares I bought back are now owned by the company, not the public.
A company sells stock to raise money. The maximum amount of stock that it could sell is the authorized stock. The actual amount of stock that is willing to sell is generally less than the amount authorized and is called issued stock. The issued stock that is sold and is held by stockholders is called the outstanding stock. The company can buy back any amount of outstanding shares, and this reacquired stock is then called treasury stock. You figure the amount of outstanding stock by subtracting the number of treasury shares from the number of issued shares.
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