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Outstanding Shares and the Float

Outstanding Shares and the Float
Restricted shares refer to a company's issued stock that cannot be bought or sold without special permission by the SEC. Often this type of stock is given to insiders as part of their salaries or as additional benefits. The 'float' refers to a company's shares that are freely bought and sold without restrictions on the open market.  These are the shares that you trade when you decide to make a purchase. 

Authorized Shares
Authorized shares refer to the number of shares that a company is allowed to issue. The number of authorized shares per company is assessed at the company's IPO and can only be increased or decreased through a vote by the shareholders. If at the time of IPO the documents state that 10 Million shares are authorized then only 10 million shares can be issued. 

Just because a company is authorized to issue a certain number of shares doesn't mean that it is going to issue all of the shares to the public. Companies sometimes keep a portion of the shares in their own treasury. For example this may be done to maintain a controlling interest within the company just to ward off any hostile takeover bids. Companies can also buy back stock on the open market at anytime and add them to the company treasury.  On the other hand the company may have shares handy just in case it wants to sell them for cash rather than borrow more money or issue more shares in a secondary offering. 

Outstanding Shares
Not to be confused with authorized shares outstanding shares refer to the number of shares that a company has actually issued. This number represents all the shares that can be bought and sold by the public as well as all the restricted shares that require special permission before being transacted. As we already explained shares that can be freely bought and sold by public investors is called the float and this value changes depending on if the company wishes to repurchase shares from the market or sell out more of its authorized shares within its treasury. 

For example say a company has 10 million authorized shares. If they offered 5 million shares in an IPO gave 2 million to the executives and retained 3 million in the treasury then the number of shares outstanding would be 7 million shares (5 million float shares 2 million restricted shares). If after a couple years the company was doing extremely well and wanted to buy back 1 million shares on the open market the number of outstanding shares would fall from 7 million to 6 million the number of treasury shares would increase from 2 million to 3 million and the float would fall to 6 Million shares since the buyback was done through the open market (7 million 1 million). 

Stock Options
As well the number of outstanding shares can fluctuate through the use of stock options. In addition to the stocks it issues to investors and executives many companies offer stock options. These options give the holder the right to purchase more stock from the company at any time.  Every time one of these options is exercised the float and shares outstanding increase while the number of treasury shares decrease. For example every time one of these options is exercised the company has to sell 100 shares from its treasury to the holder of the options. Thus increasing the float and is causing what is known as dilution of the common shares. 

Why Is It Important
By identifying the number of restricted shares versus the number of shares in the float investors can gauge the level of ownership that insiders have within the company.  If there are too many stock options outstanding then you have the potential for a company to be diluting the shares later.  These options should be expensed on the balance sheet and will affect earnings.  If they are not expensed then the company could be using creative accounting to make it look like they are making more money than they really are.  Sometimes these options are nothing more than a fleecing of the public as they transfer money from the average investor to the company insiders.  If you are planning on investing for the long haul in a particular company please check into how many options and warrants are outstanding.  You may just be lining the insider's pockets and not your own.

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