When preparing for the FINRA Series 7 exam, mastering the calculation of outstanding shares is crucial for success. In this article, we will walk through the process of calculating outstanding shares, and explore the broader context of equity securities. Use this guide to enhance your understanding, followed by interactive quizzes to test your skills.
Defining Outstanding Shares
Outstanding shares refer to the total number of shares that are currently owned by investors, including restricted shares owned by company officers and insiders as well as the shares held by the public. Calculating outstanding shares involves understanding a corporation’s issued stock and any repurchased stock (treasury shares).
Step-by-Step Calculation of Outstanding Shares
Here’s a step-by-step breakdown to help you derive outstanding shares:
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Identify All Issued Shares: Start by determining the total number of shares the company has issued.
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Determine Treasury Shares: Identify any shares that have been repurchased by the company, also known as treasury shares.
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Calculate Outstanding Shares: Subtract the treasury shares from the total issued shares using the formula:
$$
\text{Outstanding Shares} = \text{Issued Shares} - \text{Treasury Shares}
$$
Sample Example Problem
Let’s illustrate this with an example:
A company has issued 1,000,000 shares of stock. It has repurchased 100,000 shares to keep in its treasury. Calculate the outstanding shares for this company.
Solution:
-
Issued Shares: 1,000,000
-
Treasury Shares: 100,000
-
Formula Application:
$$
\text{Outstanding Shares} = 1,000,000 - 100,000 = 900,000
$$
Thus, the company has 900,000 outstanding shares.
Additional Resources
- Mermaid Diagram of Shares Calculation Process
graph LR
A[Total Issued Shares] --> B{Repurchased Shares}
B --> C[Outstanding Shares]
C[Outstanding Shares] --> D[Issuable Stock for Transactions]
- Issued Shares: The total number of shares a company has ever issued.
- Treasury Shares: Shares that were once a part of outstanding shares but were later repurchased by the company.
- Outstanding Shares: Shares currently in circulation and owned by investors.
Quizzes
### How do you calculate outstanding shares?
- [x] Outstanding Shares = Issued Shares - Treasury Shares
- [ ] Outstanding Shares = Total Assets - Total Liabilities
- [ ] Outstanding Shares = Market Cap / Share Price
- [ ] Outstanding Shares = Retained Earnings - Dividends
> **Explanation:** Outstanding shares are calculated by subtracting treasury shares from issued shares.
### A company has issued 500,000 shares and repurchased 50,000. What are the outstanding shares?
- [x] 450,000
- [ ] 500,000
- [ ] 550,000
- [ ] 400,000
> **Explanation:** 500,000 issued shares minus 50,000 repurchased gives 450,000 outstanding shares.
### Which of the following are considered when calculating outstanding shares?
- [x] Issued and Treasury Shares
- [x] Shares bought back by the company
- [ ] Dividends paid to shareholders
- [ ] Company’s net income
> **Explanation:** Only issued shares and repurchased (treasury) shares are needed.
### What is the primary function of treasury shares?
- [x] To reflect shares repurchased by the company.
- [ ] To increase the number of outstanding shares.
- [ ] To determine shares owned by the public.
- [ ] To calculate market capitalization.
> **Explanation:** Treasury shares are those the company buys back, thereby reducing outstanding shares.
### Which statement is true about outstanding shares?
- [x] They decrease when a company repurchases shares.
- [ ] They increase with no effect on company treasury stock.
- [x] They represent shares owned by investors.
- [ ] They include dividends issued to shareholders.
> **Explanation:** Repurchasing reduces them, and they represent shares owned by investors.
### How does a stock buyback affect outstanding shares?
- [x] It reduces them.
- [ ] It increases them.
- [ ] It has no effect.
- [ ] It only affects market price.
> **Explanation:** A stock buyback reduces outstanding shares.
### When considering a stock investor, which shares can they potentially own?
- [x] Outstanding Shares
- [ ] Treasury Shares
- [x] Issued Shares not repurchased
- [ ] Preferential Debenture Shares
> **Explanation:** Investors own outstanding shares derived from issued shares.
### If no shares have been repurchased, what can be inferred?
- [x] Issued Shares = Outstanding Shares
- [ ] Outstanding Shares > Issued Shares
- [ ] Treasury Shares > Issued Shares
- [ ] Market Cap directly correlates
> **Explanation:** If no repurchase occurs, all issued shares are outstanding.
### Can a company’s treasury shares affect its outstanding shares?
- [x] Yes, by reducing them.
- [ ] No, they remain unchanged.
- [ ] Sometimes, depending on company policy.
- [ ] Only in rare financial situations.
> **Explanation:** Treasury shares are subtracted to find outstanding shares.
### Only issued shares influence stock dividends.
- [x] False
- [ ] True
> **Explanation:** Issued shares lead to outstanding shares, which are actually affected by dividends.
Summary
Understanding the calculation of outstanding shares and their significance in equity securities is fundamental for anyone involved in financing and investment. By exploring examples and engaging with our quizzes, you should now be more prepared to tackle the Series 7 Exam’s equity securities section with confidence.