2. What do shares outstanding have to do in judging a stock? What is its significance?

Question

2. What do shares outstanding have to do in judging a stock? What is its significance?

Answer 1

The number of shares outstanding is useful when you look at earnings per share. You take the earnings of the company and divide it by the number of shares which gives you earning per share. You can compare the earnings per share with other earnings periods such as quarters or years, which is a better measure than merely net earnings or any other earnings number.

For example, say a company has net earnings of $100,000,000 and has 10,000,000 shares outstanding. This makes for $10 earnings per share. In the next year the company sells 2,000,000 shares to the public for a total of 12,000,000 shares outstanding. The company then makes $110,000,000 net earnings. Obviously the company makes more money. But it only makes $9.17 per share (110,000,000 divided by 12,000,000) which is the number you care about, when you own one share. The overall earnings don't really matter to a shareholder. It is more important to a shareholder to see how each share performs. This company is not performing as well for its shareholders making $9.17 than when it makes $10 per share.

Earnings per share allows you to make such a comparison.

Answer 2

Shares outstanding is similar to the FLOAT. Basically it is the number of shares available for trading. Now, sometimes a company may repurchase and hold some of their own shares, and than the shares outstanding and float may be slightly different but basically their similar.

The importance of the shares outstanding is it tells you something about the volatility of a stock. The more shares outstanding imply that it will take a lot of buying to make a stock move, up or down. For example intel has 5.7 Billion shares outstanding. On the other hand Crox, has 83 million, the more volatile stock.

Answer 3

It depends on your investing style.  I figure out cash flows and divide it among the outstanding shares to come out with a value of a stock.  So I look at the shares outstanding to determine my share of the pie I own and when I feel it is time to buy.