Outstanding stock refers to the number of common stock shares that are in the hands of shareholders.
When a corporation is formed, one of the documents which the individuals forming the corporation must file with the state is the articles of incorporation. The articles of incorporation specify, among other items, the maximum number of shares which the corporation can issue. The corporation then issues shares (usually) in exchange for a capital contribution from shareholders.
The number of shares issued may not equal the number of shares outstanding. Companies often repurchase shares, which reduces the number of shares outstanding. These repurchased shares are called treasury stock. The number of shares which a company has outstanding is thus the number of shares issued minus the number of shares held in the treasury stock account.
Companies may issue additional shares in order to raise capital. Companies also often issue shares to corporate officers (and possibly other employees) as compensation.
Consider the following example. A company’s articles of incorporation state that the company may issue up to 10 million stock shares. The company initially issues 1 million shares to investors. In the first year of business, the company issues 300,000 shares to employees and repurchases 250,000 shares. To find the number of shares the company has outstanding at the end of the year, we start with the 1 million shares initially issued. We then add the 300,000 shares the company issued to employees and subtract the 250,000 shares the company repurchased. Thus, the company had 1.05 million shares at the end of the year.
