Difference Between Issued and Outstanding Shares

Key Difference – Issued vs Outstanding Shares
 

It’s important to know some background information about shares before learning the difference between issued and outstanding shares. A share is a unit of ownership that demonstrates the stake an investor has in the activities of an organization. An investor who is interested in purchasing shares in a particular company can do so by paying the market price of the shares, which makes him a shareholder of the company. The number of shares collectively owned by the shareholder is called issued shares. The value of such shares is referred to as share capital.

The main objective of issuing shares by a company is to gain access to a large pool of funds to enable attractive investment opportunities. A share issue offered for the first time to the public at large is named an Initial Public Offering (IPO) and the company is listed on a stock exchange for the first time and start trading shares. Subsequently, these shares will be traded in primary or secondary stock exchanges.

The key difference between issued and outstanding shares is that issued share capital includes the treasury shares whereas outstanding shares do not include treasury shares (shares that have been repurchased by the company and are held by the company in its own treasury). For example, consider that a company offers 10,000 shares to the public. After some time, the company repurchases 1000 shares. Subsequent to the repurchase, the number of outstanding shares will be 9000.

What are Issued shares?

Issued shares mainly comprise of ordinary shares and preference shares. Ordinary shares or the common shares carry greater risks; in case of insolvency, ordinary shareholders will be settled after the preferred shareholders. Furthermore, preferred shares are entitled to greater dividends compared to common shares. However preferred shares usually do not carry voting rights whereas common shares do.

Accounting entry for share issue

Cash A/C                                             Dr

Share capital A/C                               Cr

Sometimes a company may realize that its shares are undervalued in the market following a share issue. In such an instance, a share repurchase may be exercised in order to send a signal to the market that the shares are undervalued. This refers to the buying back of shares by the company. Following the repurchase, the number of outstanding shares will reduce. When the company repurchases the shares, the above entry will be reversed; thus, the number of shares available for subsequent trading will be reduced. The shares repurchased will be held by the company in its own treasury. These shares are called treasury shares.

What are Outstanding Shares?

These are the number of shares remaining following a share repurchase. If the company does not exercise a share repurchase, then the number of issued shares will be equal to the number of outstanding shares.

The amount and value of issued shares are subjected to fluctuations over time due to various changes in the structure of the shares. These changes to the number of shares positively affect the Earnings per Share (EPS). In addition to the share repurchase, share splits and share consolidations can be exercised on outstanding shares.

Share Splits

Outstanding shares can be split in order to increase the number of shares. For example, if a company has 1000 outstanding shares and a 3 for 1 share split is undertaken, the subsequent number of shares will be 3000.

Share Consolidation

This is the opposite of share splits and results in a decrease in the outstanding number of shares. For instance, if a company has 1000 outstanding shares before undertaking a share consolidation, the subsequent number of shares will be 500 shares.

What is the difference between Issued and Outstanding Shares?

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