When companies issue stock they often split their shares up. Some shares, typically most of them, get offered to the general public. Others are restricted, which might be held by the company itself or have different rules about how investors can trade them. The difference is expressed as the company’s shares outstanding vs. its floating stock. Consider working with a financial advisor to maximize returns on your investments.
What Are Shares Outstanding?
A company’s shares outstanding is the total number of shares that it has in circulation. This includes absolutely all shares of stock, not only those available on the general market but also those held by the company itself, those held by executives and insiders, any shares restricted to private trading, etc.
Each share of stock in a company measures a percentage of ownership in that company overall. For example, say a company releases 50% of its total ownership in the form of 100 shares of stock. In this case, each person who buys one share of stock would own 0.5% of the company.
When a company releases shares of stock it decides how much of the company’s ownership it wants to sell and how many shares to release. From our example above, say, the company decided to release 50% of its ownership in the form of 100 shares.
The number of outstanding shares that a company has can change over time. During the company’s IPO it sets the initial number of shares that it will issue. However, a company can issue new stock in the future, expanding the number of outstanding shares by releasing new ones on to the market or it can buy back shares and remove them from the market altogether, reducing the number of outstanding shares.
The maximum number of shares that a company can ever legally issue is called the firm’s authorized shares. A company’s authorized share number is generally defined in its articles of incorporation and can be changed by the shareholders. The number of outstanding shares can never exceed the number of authorized shares. A company can, however, issue fewer outstanding shares than its authorized shares. This gives it the flexibility to make new stock offerings in the future.
What Is Floating Stock?
Floating stock, sometimes known as the “public float,” is the number of shares that a company has issued for general trading. This is the number of outstanding shares less the number of restricted or closely held shares, and it represents the company’s overall liquidity. To understand this it’s important to understand that not all shares of stock are created equal. Often companies will issue what is known as “restricted” stock and “closely held” stock.
Restricted stock refers to shares of stock that the company has issued to its own employees and executives. They are used as part of compensation and incentive packages, generally intended to align the employee’s interests with the company’s. For example, if some of your compensation is paid in stock then the better the company does, the better you do.
These shares almost always come with restrictions on how and when you can trade them; hence the term “restricted stock.” The two most common restrictions are: Vesting rules, which define when you are allowed to sell the stock, and buyer rules, which require you to sell this stock only to the company that issued it. Whatever the details, restricted stock is not traded on the open market.
Closely held shares are generally owned by company insiders and accredited investors. These shares are traded privately, between individuals rather than on the open market, and rarely come available for general trading. Depending on how the company defines its closely held shares, it may not be legal to trade these shares with the general public.
A company can diversify its shares in many different ways. Typically it will do so by identifying shares as different classes (generally using the terms Class A Stock, Class B Stock, Class C Stock and so on).
Aside from general securities laws there are no legal requirements around how a company must structure its stock. Calling something “Class A Stock,” say, doesn’t have any special regulatory status. Instead, the company itself will define the different rules that apply to each class of stock that it issues. For example, a company might issue Class A stock for general trading by all investors. Then it might issue Class B stock as restricted stock that can only be issued to employees and only purchased back by the company itself.
A company’s floating stock, then, is defined as the total number of outstanding shares less the number of restricted and closely held shares. For example, say a company has 10 million shares of outstanding stock. This means that it has 10 million shares of stock total, in all forms in all hands. Say this company has reserved 2 million shares as restricted stock for employees and institutional investors. It would then have a stock float of 8 million shares or 80%.
The stock float measures how the company has balanced liquidity against stability and employee ownership. When a company has a low stock float, that typically means that most of the company is owned by its employees. There are proportionally few shares to trade on the open market, which can sometimes lead to price volatility. When a company has a high stock float, that means that far more of its shares are held by private investors. This is a more liquid stock that you can trade more easily, but the company has fewer shares to use in its compensation packages.
The Bottom Line
A company’s shares outstanding measures how many shares of stock it has issued altogether. Its stock float tells you how many of those shares are available to the general public. Together they are an important measure of a company’s liquidity and ownership status.
Tips on Investing
Don’t stop here! You’ve just found the tip of a big, very exciting iceberg. Read on to understand just what restricted shares are and how they have become a major part of compensation packages over the past generation.
What kind of stocks should you trade? It’s an important question. Do you want the more volatile stocks? The more stable ones? The ones with high employee ownership? Or the ones more exposed to the market? These are serious questions, and they deserve serious – profession – answers. That’s where a financial advisor comes in. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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