Understanding Stock Share Terms
An investor’s life would be much simpler if all shares of stock were created equal, but due to regulations and the needs of the issuing company shares of stock come in a variety of flavors. For an investor looking beyond the very basics an understanding of these terms is vital to their long term success.
These are all the shares of stock issued by the company when it was first formed. New shares cannot be added to the total number of authorized shares without a vote of all current shareholders.
Just because a company creates a certain number of shares, this does not mean they will necessarily issue all of those shares to the public. The company will, usually, keep a certain number of shares (unissued shares) in its treasury that are not available for sale to the public.
Restricted shares are those sold either as part of a private offering or given to employees as part of a stock incentive program. Restricted shares must receive the permission of the SEC in order to be sold, most fall under rule 144 which provides a safe haven to the seller.
Float shares are all the shares available for trade on the open market. You can calculate the number of float shares by subtracting the number of unissued shares and the number of restricted shares from the number of authorized shares.
The outstanding shares are all the shares issued by the company except for the unissued shares. You can calculate the outstanding shares either by adding up the restricted and float shares, or by subtracting the number of unissued shares from the number of authorized shares.
Why Should I Care?
By understanding these relationships the investor can determine who has a controlling interest in the company, look at the trading patterns of the restricted shareholders, and understand how certain metrics are calculate—are they using float shares or outstanding shares in their calculations.