Financial terminology can be confusing, but for those interested in investing in products such as stocks, bonds or mutual funds, it is very important to master this. Many financial ratios used in fundamental analysis include terms such as outstanding shares and liquidity.Let’s take a look at the terms share and float So that next time you encounter them, you will know their importance.
Restricted and floating
When you look closely at the quotes of a company’s stock, you may find some obscure terms that you have never encountered before. For example, restricted stock refers to the issued stock of a company that cannot be traded without the special permission of the US Securities and Exchange Commission.Usually, this type of stock is provided to insiders as part of their salary or fringe benefits. Another term you may encounter is float. This means that the company’s stock can be freely traded without public restrictions. Represents the largest percentage of stocks traded on an exchange, and floats are made up of common stocks that many of us will hear or read in the news.
Authorized shares refer to the maximum number of shares that a single company can issue. The number of authorized shares of each company is evaluated when the company is established, and can only be increased or decreased through shareholder voting. If the document stipulates that 100 shares have been authorized when the company is established, only 100 shares can be issued.
But just because a company can issue a certain number of shares does not mean that it will issue all shares to the public. Usually, for a variety of reasons, companies keep part of their shares in their own warehouses. For example, XYZ company may decide to maintain a controlling interest in the Ministry of Finance to defend against any hostile takeover offer. On the other hand, if the company wants to sell stocks for excess cash (rather than borrowing), the company may have stocks on hand. The tendency of companies to retain some authorized shares brings us to the next important and related term: tradable shares.
Not to be confused with authorized shares, tradable shares refer to the number of shares issued by the company. This number represents all stocks that can be traded publicly, as well as all restricted stocks that require special permission to trade. As we have already explained, stocks that can be freely bought and sold by public investors are called tradable stocks. The change in this value depends on whether the company wants to buy back shares from the market or sell more authorized shares from its inventory.
Let us review our company XYZ. From the previous example, we know that this company has 1,000 authorized shares. If it issues 300 shares in an IPO, 150 shares to executives, and keeps 550 shares in the treasury, the number of shares outstanding will be 450 shares (300 shares outstanding + 150 restricted shares). If XYZ performs very well in a few years and wants to buy back 100 shares from the market, the number of outstanding shares will drop to 350 shares and the number of treasury shares will increase to 650 shares. Since then, the number of outstanding shares will drop to 200 shares. The repurchase is approved. The market (300-100) is done.
The number of outstanding shares may also fluctuate in other ways. In addition to issuing stocks to investors and executives, many companies also offer stock options and warrants. These tools give holders the right to buy more shares from the company’s warehouse. Each time one of these instruments is activated, the number of shares outstanding and the number of shares outstanding increases, while the number of treasury shares decreases. For example, suppose XYZ issues 100 warrants. If all these warrants are activated, then XYZ will have to sell 100 shares from its inventory to the warrant holders. Therefore, according to the most recent example, where the number of outstanding shares is 350 shares and the total number of treasury shares is 650 shares, the exercise of all warrants will change the number to 450 and 550 respectively, and the number of outstanding shares will increase to 300. This effect is well known as dilution.
Since the difference between the number of authorized and outstanding shares can be so large, it is important to understand what they are and the numbers used by the company. Different ratios may use the basic number of outstanding shares, while other ratios may use a diluted version. This may significantly affect the numbers and may change your attitude towards specific investments. In addition, by determining the number of restricted stocks and the number of outstanding shares, investors can measure the level of ownership and autonomy that insiders have within the company. All these situations are important for investors to understand before making a buying or selling decision.