Business entities structured as stock corporations can establish ownership in a fractional manner; individuals and organizations can become company owners by means of acquiring a fraction of the business, which is represented by a number of shares. Aside from representing equity and ownership, shares also give individuals and organizations voting rights for the purpose of electing company directors.
With regard to the number of shares that stock corporations can determine, company principals must follow the rules of the financial jurisdiction where they are registered. Many states allow corporations to divide their equity into no more than 10 million shares. Business principals must submit a request indicating the number of shares to be authorized; they must also report the numbers of shares issued, which means the shares that they intend to make available to prospective investors. Shares that are not issued form part of the company’s treasury stock.
Let’s say a pizza delivery business in Nebraska registers as a stock corporation and asks the Secretary of State to authorize 100,000 shares. If the company decides to issue 90,000 shares to list on over-the-counter public markets, known as “pink sheets,” the remaining 10,000 shares can be considered to be treasury stock. The number of shares outstanding will always be equal to shares authorized minus the treasury stock. In the example of the Nebraska pizza delivery business, the number of shares outstanding will be 90,000 as long as the company does not reacquire them.
Shares of publicly traded companies listed on major Wall Street exchanges such as the NASDAQ and the NYSE may include preferred and common stock; the sum of these two share classes is equal to the outstanding shares. The United States Securities and Exchange Commission requires Wall Street companies to report the status of their shares on their financial reports and balance sheets, which must be made available to the public. The major exchanges make this information available in real-time for traders and investors; for example, the NASDAQ reported nearly seven billion shares outstanding for Microsoft.
Knowledge of outstanding shares can come in handy for investors who follow a strategy of growth at reasonable price, which is part of fundamental analysis. When a corporation reports its assets and liabilities, the difference between the two indicates the book value of the company; when the book value is divided by the number of outstanding shares, investors can figure out the book value per share and the price-to-book (P/B) ratio.
The P/B ratio of a stock can be calculated by dividing the current share price by the book value per share. This ratio, which can be compared against averages for the industry or sector where the company is classified, can alert investors about undervalued stock.
The bull market conditions experienced since 2016 have resulted in very high P/B ratios for many companies; this can be a good opportunity for investors who believe that the market will undergo corrections since low P/B ratio stocks tend to appreciate very quickly once rational trading returns to Wall Street.