Data that are frequently reported about a stock are the number of shares outstanding and the float. These two bits of information are not the same thing, although they are closely related. In a nutshell, the outstanding shares (also known as issued shares) are those held by the public but possibly restricted from trading, and the float is the number of shares held by the public and available for trading.
If that was not clear, let’s begin at the beginning. When a company incorporates, the articles of incorporation state how many shares are authorized and can be issued. For example, the company NotLosingMoney.com could incorporate and have 1,000,000 (one million) shares. This is the number of authorized shares. At the moment of incorporation, these shares are held in the company treasury (at least that’s what people say); the number of outstanding shares and the float are both zero.
Next our example company sells some percentage of the authorized shares to the public, possibly via an inital public offering (IPO). The company chooses to sell 10% of the authorized shares to the public. In addition, as part of going public, the company grants 10% of the authorized shares to employees etc., but these people cannot sell their shares for six months. So after the IPO, 200,000 shares are publicly held, and the rest is in the company treasury. We say that the number of shares outstanding is 200,000. However, due to various restrictions placed on the employees, their share holdings cannot be traded. While the restriction on insiders (commonly called a lockup) is in force, just 100,000 shares are available for trading, so the float is 100,000 shares.
You may have heard the term “thin float” in connection with an IPO. This refers to the practice of allowing just a small percentage of the authorized shares to be sold to the public in the IPO. In cases where demand was high (and the supply was artificially low), the result was large jumps in price on the first day of trading.
When a company buys back its own shares on the open market and returns these shares to the company treasury, this reduces both the float and the number of outstanding shares. If a company has sufficient cash to purchase shares, in theory these purchases could eventually buy all the shares outstanding, which is essentially the same as taking the company private.
The outstanding share count can also be increased in ways other than an IPO or direct grants of stock. Frequently a company offers stock options or warrants to employees, executives, or (less frequently) to really good friends of the CEO. When those people exercise their options, the company may choose to release shares from the treasury. Because the number of outstanding shares increases, this is known as dilution, since the ownership stake of existing shareholders is diluted by the newly issued shares. Another way a company can issue additional shares is called a secondary offering, where stock is offered for sale to the general public or to a select few.
Perhaps it is obvious, but when a company splits its shares, the number of authorized shares and the float are both affected by the split. For example, if a large company had 100 million shares authorized and implemented a 2 for 1 split, then after the split the company has 200 million shares authorized. Their float also doubles.
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Contributed-By: Chris Lott