When you start exploring the stock market, you may come across several terms that seem similar. Two such terms are outstanding shares and floating shares. People often use these terms interchangeably, but they have different meanings.
In today’s blog post, we will give you an overview of outstanding shares and floating shares along with their key differences.
What are Outstanding Shares?
Outstanding shares are the total number of shares issued by the company that its shareholders currently hold. Anyone can hold these shares, including retail investors, promoters, directors, and institutional investors. Simply, we can say that outstanding shares let us know how many shares of a company are in the hands of investors; however, it does not include the shares that are bought back by the company and held in its treasury.
Formula to Calculate Outstanding Shares
Outstanding Shares = Issued Shares – Treasury Shares
How to Calculate Outstanding Shares
Let’s understand the calculation of outstanding shares in steps:
- Identifying the Total No of Issued Shares: The first step is to identify the total number of shares the company has issued.
- Treasury Shares: Once you calculate the total number of issued shares, then one needs to calculate the treasury shares, which include shares that the company has repurchased from the market and continues to hold.
- Subtracting the Shares: After calculating both total shares and treasury shares, one needs to subtract these it represents the total number of outstanding shares that a company has.
Example of Outstanding Shares
Now, we will explain outstanding shares to you through an example:
A company named ABC Limited has issued a total of 100 crore shares.
After a few years, the company buys back 15 crore shares from the market.
Now, the total outstanding shares will be calculated as follows:
Outstanding Shares = Issued Shares – Treasury Shares (Buyback Shares)
= 100 crore shares – 15 crore shares
= 85 crore shares.
What are Floating Shares?
Floating shares are commonly known as public floating shares; these are the shares of a company that are publicly available for trading. This means a retail investor can buy and sell it on the exchange during market hours. These shares do not include shares held by executives, directors, founders, the government, or any strategic investor. A large number of floating shares means more shares available for trade and higher liquidity.
Formula to Calculate Floating Shares
Floating Shares = Total Outstanding Shares – Shares held closely
How to Calculate Floating Shares
The steps to calculate floating shares are as follows:
- Finding the Outstanding Shares: The first step is to find out the total number of outstanding shares, or the shares that are currently held by shareholders.
- Identify the closely held shares: Next, determine the shares held by promoters, founders, strategic investors, etc., because these shares are not considered freely available for public trading.
- Subtraction of Restricted Shares: Subtract the closely held shares from the outstanding shares to get the floating shares.
Example of Floating Shares
Let’s understand the floating shares through an example:
A company named ABC Limited has 10 crore outstanding shares. But out of these 10 crore shares, 4 crore shares are held by promoters, and an additional 1 crore shares are held by a strategic investor, and these shares are not considered freely tradable.
Therefore, the floating shares will be calculated as follows:
10 crore shares – (4 crore shares held by promoters + 1 crore share held by strategic investor)
= 5 crore will be the total number of floating shares that are available for public trading.
Difference Between Outstanding Shares and Floating Shares
The key difference between outstanding shares and floating shares is as follows:
| Particulars | Outstanding Shares | Floating Shares |
|---|---|---|
| Overview | It refers to the total number of shares currently held by all shareholders. | Floating shares include the outstanding shares available for public trading. |
| Scope | It broadly measures the shares of a company. | It measures the narrow part of publicly tradable share/ |
| Promoter Holdings | This includes the holdings of founders and promoters. | It does not include the holdings of promoters. |
| Key Objective | Its key objective is to determine the ownership and per-share financial metrics. | This helps in understanding the publicly available share supply. |
| Market Capitalisation | This is calculated on the basis of total market capitalisation. | It uses free-float market capitalisation. |
| Size | It is greater than or equal to the number of floating shares. | Floating shares are usually less than or equal to outstanding shares. |
| Changes | The total number of outstanding shares changes based on buybacks, new issues of shares, conversions, and other corporate actions. | It changes because of public ownership, promoter stake sales, etc. |
Things Investors Should Keep in Mind before investing in shares
The key factors that investors should keep in mind before making any investment in shares:
- Not all Shares are Freely Tradable: A company generally has a large number of outstanding shares, but there might be chances that a significant portion may be held by the promoters, founders, etc., and such shares are not freely available for trade.
- Shareholding Pattern: Shareholding patterns may change over time due to various factors such as fresh issue, buyback, etc. Therefore, before making any investment in equities, one must check the company’s latest shareholding information.
- Liquidity: The number of floating shares of a company indicates how many shares of a company are available for trading. A company with relatively fewer floating shares may have lower liquidity and can experience sharper price movements when buying and selling increases.
- Do not depend on the number of shares: A large or small number of shares does not indicate that the stock is a good investment option. There are various other factors which an investor must consider before making any investment, such as revenue growth, profitability, cash flows, etc.
Conclusion
On a concluding note, before making any investment, one must understand the difference between outstanding shares and floating shares. From an investor’s perspective, both of these terms are considered interchangeable, but there is a significant difference between these two terms. Both of these numbers should not be viewed in isolation; the investment potential of a stock depends on these two terms, as they provide insight into the liquidity, tradable supply and expected price movement. However, other factors such as revenue, profit growth, etc. it is always advisable to consult your investment advisor before making any investment in stocks.
Frequently Asked Questions (FAQs)
Is it possible that a company’s floating shares are equal to its outstanding shares?
Yes, it is possible only if the company’s outstanding shares are freely available for trade and there are no closely held shares.
What is the meaning of outstanding shares?
Outstanding shares refer to the shares of the company that are currently held by the shareholders. It includes shares that are held by promoters, institutional investors, retail shareholders, etc., but it does not include the shares held by the treasury of the company.
Among floating and outstanding shares, which is required to calculate a company’s EPS?
Only outstanding shares are required to calculate the earnings per share of the company. EPS often uses weightage average number of shares outstanding during the relevant period rather than including the year-end count.
What is free-float market capitalisation?
Free-float market capitalisation is the value of shares available for public trading. It is calculated by multiplying the company’s share price by its free-float shares.
Where can I find the total number of outstanding shares of a company?
Investors can easily find the total number of outstanding shares of a company in the shareholding pattern in the company’s financial report.
