“To know values is to know the meaning of the market”
Do you feel like an outsider when people start using stock market lingo? If you are interested in the stock markets or would like to invest in mutual funds or bonds, it is important to understand the basics of financial lingo. Outstanding shares and the float are commonly used in different types of financial analysis. At Growing Money, we would like our readers to understand the basic difference between these terms and make informed choices.
What are restricted and float shares?
It is quite common for an investor to get insights about a company of interest; however, there might be some terms that new investors are not aware of. Restricted shares are among one of these terms and refers to the company issued shares, which are not available for sale unless you have permission from the Securities and Exchange Commission (SEC). SEC is a government body whose main responsibility is to protect investors and monitor corporate takeovers within U.S. Generally, these shares are available to the insiders only and offered as special benefits or salary.
Float shares are those shares, which are available for daily trading and can be bought or sold without any public restrictions. A large number of float shares dominate the stock market and we hear about these shares in market analysis and stock news.
What are outstanding shares?
In simple terms, outstanding shares signify the total number of shares issues by a company. It includes both restricted shares requiring special SEC permission as well as float shares, which are available for free trading in public. Most of the companies retain over 55 percent of their shares (also called treasury shares) and offer rest in outstanding shares. The value of outstanding shares would fluctuate in two cases only; first, if the company were planning to sell authorized shares from its treasury; second, if the company were planning to repurchase its available shares in the market.
Understanding Authorized Shares
As mentioned by Investopedia.com, Authorized stock
“The maximum number of shares that a corporation is legally permitted to issue, as specified in its articles of incorporation. Authorized stock, also known as “authorized shares” or “authorized capital stock,” is also usually listed in the capital accounts section of the balance sheet. Authorized shares should not be confused with outstanding shares, which are the number of shares the corporation has actually issued that are held by the public.”
For every company, authorized shares are assessed during the inception period of the company and only the shareholders have the right to increase or decrease this number. Most of the companies do not issue their entire stocks to the public. They rather prefer to keep them in the form of treasury stocks and rule out any risks of hostile takeover in future. In some cases, the company might even plan to sell these shares for easing a credit crunch.
For a successful investment decision, it is important to understand the difference between authorized and outstanding shares. When you plan to invest in a company, find out the term that the company is using. Some market analysis may use outstanding share as their basis whereas other may use authorized share for calculations. In addition to it, the ratio of restricted and float shares offer an insight about the ownership of the company. All of these aspects are important before making an investment decision.