Why does share count matter to investors?

A stock, also commonly called a share or equity, is a financial security that represents the ownership of a fraction of a corporation.

Each stock holds value because it has a legal claim on the business's profits.

But how much of a business’s profit is each stock entitled to?

This is a crucial question for investors and depends on how many shares the company has issued.

If you own one share of a company with four total shares outstanding, you own 25% of the company.

Total shares outstanding is the total number of shares of a company.

So, if the company has 100 shares, you only own 1%.

If the company is divided into a billion shares, well … you only own one-billionth of the company.

These are big differences!

Using per share metrics

This difference is why so many of the most important metrics investors calculate and need to know are on a per-share basis, such as earnings per share (EPS) or free cash flow per share.

If your share of ownership is decreasing, even while revenues and profits increase, you might be invested in shares of a stock that won’t appreciate at a desirable rate of return.

How to find the total shares outstanding

This is why tracking the shares outstanding for all your investments is crucial.

This number is found on the front page of the company’s quarterly SEC filing, the 10-Q, or its annual filing, the 10-K.

Some companies list it on the income statement to show how they calculated their EPS numbers.

Companies will report their:

• Basic shares outstanding, which is the common stock of a company that all investors can buy‍
• Diluted shares outstanding, the common stock plus convertible stock and employee stock options.

Essentially, the diluted number lets investors know the total number of shares that would exist if all such options were exercised.

Events that impact total shares outstanding

There are seven common events that can impact this number, some positively and others negatively, for investors:

1 - Initial public offering (IPO)

This is the event that enables a private company to go public, issuing shares to the public for the first time.

This is usually done to raise cash from additional investors (the public) so the company can grow and expand.

2 - Secondary offerings

After a company is public, it may perform a secondary or follow-on offering, issuing new shares that are sold to the public.

This is done to raise additional capital for the company's needs, but it comes at the expense of diluting existing shareholders.

3 - Convertible stock

Put simply, convertible stock is a debt security that can be converted into a predetermined number of shares.

This allows the company to raise capital at a lower interest rate than other types of debt, but it can be very dilutive.

4 - Stock-based compensation

Stock-based compensation, sometimes called share-based compensation, is when a corporation uses stock or stock options to reward employees instead of paying them cash.

This can be good because it can incentivize employees to think and behave like owners (If the company does well, I'll benefit!), but too much of it and existing shareholders can be diluted from seeing profits.

5 - Stock splits

Stock splits occur when businesses divide their existing shares into multiple new shares. This is usually done to lower the stock price.

Conversely, companies can also undergo reverse stock splits, reducing the number of shares outstanding. This raises the price of each share and is usually done for listing requirements by exchanges and indices.

Neither stock splits nor reverse stock splits are dilutive or accretive for existing owners; they change the number of shares investors own and how much each share is worth-- but not the overall value.

6 - Mergers and acquisitions

In mergers and acquisitions, companies may use stock instead of cash to buy other companies (sometimes, acquisitions are made using a combination of cash and stock).

While this dilutes existing owners, the additional earnings from the acquired company would adequately compensate them for the dilution.

7 - Share repurchases

Share repurchases, or stock buybacks, are when companies buy shares of their stock from their investors.

This decreases the total number of shares outstanding, leaving remaining shares entitled to a larger share of the company's earnings.

Nuance is needed

As with so many things in investing, nuance is needed to judge the actions above.

Not all dilutive events are bad. For instance, cash-strapped companies can use stock-based compensation in the early stages of growth to retain and reward talented employees.

Conversely, not all accretive events are good. If a company’s shares are wildly overvalued, spending money to repurchase them can be a poor capital allocation decision.

Key Takeaway

Understanding share count is vital for investors, as it directly impacts their ownership stake and the value of their investments. The total shares outstanding not only affects key metrics like earnings per share (EPS) but also provides insight into the company's capital structure and potential dilution.

Events such as IPOs, stock splits, and share repurchases can significantly influence this number, each carrying its own implications for existing shareholders.

By keeping a close eye on share count and its fluctuations, investors can make more informed decisions and better assess the true value of their holdings.