Whatever market you consider, whether domestic vegetables or stocks, demand and supply play a crucial role in all mechanisms. And how is the supply of a particular share determined? Let’s understand.
At the outset, among all the parameters that need to be considered, do you think the number of shares would be of any interest to the shareholders, management, or even the potential investors? Well… Yes. They surely are. So how are they determined?
For practical purposes, three main aspects of share capital are Authorised share capital, Outstanding shares, and Floating shares. The entire chunk of share capital is known as authorised share capital, of which, a proportion is known as outstanding shares. A proportion of these outstanding shares comprises what is known as floating stock.
So, what are these outstanding and floating shares actually? Read on to make sense.
Outstanding shares are the number of shares that a company issues for trading. These are shares that are held and actively traded by the shareholders.
To put it in simpler words, a company does not always call for the entire eligible amount from the public at once. The proportion of authorised capital issued to the public is known as issued capital. After deducting treasury shares, the balance is known as outstanding shares.
Outstanding shares include shares held by directors, employees in the form of Employees’ Stock Option Plan (ESOP) or sweat equity, institutional investors, and the public at large. This number of outstanding shares increases when the company issues additional shares. There is also a possibility of these shares reducing. This happens when the company buys back its shares. But unless there is any buyback or delisting, this is generally static or increasing.
For instance -
Importance of Outstanding Shares
For any individual analyzing a company’s stock, the number of outstanding shares becomes an important consideration. Outstanding shares are used for many financial calculations. For example, the stock price is basically the present value of future earnings per share as perceived by investors. So higher the number of outstanding shares, the more the profit is diluted.
It also helps determine the market capitalization, in simple terms, the value of the business.
Floating stocks (or simply, Float) are the number of shares available for trading to the public. In other words, it excludes restricted stock and closely held shares. Restricted stock refers to insider shares that cannot be traded due to a temporary reason, like the lock-in period of the IPO. Closely-held shares are the shares held by insiders, major shareholders, and employees.
Importance of Floating Stock
Floating stock is an essential consideration for analyzing companies. Companies having a low float implies that active trading is not very easy. Some investors might resist trading in such companies as entry and exit become slightly difficult compared to higher float companies.
Institutional investors also avoid buying stocks having low float as these types of investors usually transact in bulk quantities, and low float would hamper their primary objective.
Some indices also use floating stock as the basis for calculating market capitalization. These are known as free-float capitalization indices. The S&P 500 is the best example of this.
Outstanding shares vs. Floating stock
Now that we’ve understood the meaning of the terms, let us now look at the significant difference between both these terms:
Outstanding shares include all kinds of shares, whereas floating stock represents only those available for the public.
Outstanding shares are an essential parameter as they form the basis for calculating various financial indicators like market capitalization and earnings per share. On the other hand, floating stock only acts as a determinant of financial calculations.
Outstanding shares can be issued by private and public companies. In contrast, floating stock consists of shares issued only by public companies listed on any of the stock exchanges.
Market capitalization calculated based on floating stock is generally considered more relevant by most investors when compared to that calculated based on total outstanding shares.
Outstanding shares provide voting rights and ownership in the company. Float shares do not offer any such right or ownership.
If the floating stock is significantly less compared to the outstanding shares, it means fewer shares are available in the market for trading. This implies volatility in the market price of the stock.
The quantum of outstanding shares is mentioned in the balance sheet, but floating stock isn't part of a traditional balance sheet format.
Outstanding shares & Floats of some Indian companies
(as of 7th June 2021)
- Outstanding shares: 12.27 billion
- Floating stock: 7.64 billion
Reliance Industries Limited
- Outstanding shares: 6.34 billion
- Floating stock: 3.34 billion
- Outstanding shares: 4.24 million
- Floating stock: 2.49 million
Apollo Hospitals Enterprise Limited
- Outstanding shares: 143.78 million
- Floating stock: 100.13 million
ICICI Bank Limited
- Outstanding shares: 6.92 billion
- Floating stock: 6.8 billion
Both these concepts of outstanding shares and floating stock are significant for different reasons. A company needs to strike a balance between the number of outstanding shares and floating stock. Of course, these figures are subject to fluctuation.
These figures can be obtained on the company’s financial statements, and also in stock screener tools like Ticker. It’s always advisable to take note of these facts before you decide on investing in a company.
And not just this, you must do proper research on all relevant attributes of your wishlisted companies, and only then decide whether it fits your bill or not.
As we always believe -
Invest in what you know.