When studying the annual report of a corporation, you may notice that the number of shares issued by the company exceeds the number of outstanding shares. In such cases, you will also see an additional item in the financial statements, called treasury stock. Understanding these intricacies is crucial, since the number of shares outstanding will determine how much of a claim each stockholder has to the company's earnings.
The number of shares issued by a company includes all stock that has been created by the company. Back in the old days, when companies used to print stock certificates, the number of certificates printed were equal to total issuance. Today, however, most shares exist merely as an entry in electronic systems. Not all of the shares that have been issued are available for trading however, nor can all shares receive a part of the issuing company's earnings or vote in the annual shareholder meeting.
The number of shares issued and outstanding shares will differ, if the issuing company has purchased some of its own stock. These shares are referred to as treasury stock, since they are held in the treasury. The number of outstanding shares equals stock issued, minus treasury stock. Some groups may also refer to these shares as repurchased stock. Such shares are not paid a dividend, because this would result in the company paying dividends to itself. When calculating the earnings or dividend per stock, analysts therefore use the outstanding share count, as opposed to the number of shares originally issued.
Companies repurchase their own shares to reduce the number of outstanding shares and thereby increase the attractiveness of each share. After a stock buyback, the company's earnings potential stays the same, but the number of claimants to these earnings declines. This is akin to keeping the size of the pie the same, but reducing the number of slices you divide it into. A stock buyback will of course result in a significant cash drain, as the company must pay the prevailing market price for its own shares. In most cases, the news that the company will repurchase its shares lifts the stock price up, and the company therefore pays a premium over the price that the stock was trading at when it decided to buy its own shares.
Complex Ownership Structures
Many large companies have fully or partly owned subsidiaries. It is important to note that shares of a corporation held by its subsidiaries is not considered treasury stock, even though paying dividends to these shares essentially constitutes the corporation paying money to itself. Company A may own over 90 percent of Company B's stock, making B a subsidiary of A. But B may also hold a million shares of Company A. These shares of company A, held by Company B, are paid a dividend and not considered treasury stock, even though Company A is essentially the sole owner of these shares.
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