Weighted Average Shares vs. Shares Outstanding

Shares outstanding and weighted average shares are both numbers that can help an investor understand how well a company performs over time.

• Shares outstanding is the total number of shares that the company has issued, whether they are owned by investors or held by insiders.
• Weighted average number of shares adjusts for fluctuations over time and is most useful to investors keeping track of the cost basis of shares acquired over time in a series of purchases.

Outstanding Shares

Outstanding shares refers to shares that are currently in circulation. It includes shares held by the general public and restricted shares that are owned by company officers and insiders.

The number of outstanding shares changes periodically as the company issues new shares or repurchases existing shares, splits its stock or reverse-splits it. It also changes as employee options are converted into shares.

Shares outstanding is an important number in evaluating a stock. Earnings per share is a measure of a company's valuation, calculated by dividing its profit by the number of shares outstanding. A company's market capitalization is the current market value of all of its outstanding shares.

Weighted Average Number of Shares

The weighted average shares outstanding, or the weighted average of outstanding shares, takes into consideration any changes in the number of outstanding shares over a specific reporting period. In effect, it weights any change in the number of shares outstanding according to the length of time that change was in effect.

The weighted average is used by accountants reporting a company's financial results in accordance with GAAP (Generally Accepted Accounting Principals).

Among investors, it is most relevant to those who compile a position in a stock over a long period of time, buying on the dips and holding the shares.

Stock prices change constantly, making it difficult to keep track of the cost basis of shares acquired over time. But the investor wants to know what the shares cost. Calculating the weighted average helps.

Calculating Weighted Average Number of Shares

To calculate a weighted average of the price paid for the shares, the investor must multiply the number of shares acquired at each price by that price, add those values, and then divide the total value by the total number of shares.

The weighted average is a mean value calculated by averaging each quantity against an assigned weighting to determine the relative importance of each quantity.

The weighted average number of shares is determined by taking the number of outstanding shares and multiplying it by the percentage of the reporting period for which that number applies for each period. In other words, the formula takes the number of shares outstanding during each month weighted by the number of months that those shares were outstanding.

Weighted Average Cost Per Share

Investors may choose to use weighted averages if they have compiled a position in a particular stock over a period. Given continuously changing stock prices, the investor will calculate a weighted average of the share price paid for the shares.

To calculate the weighted average cost per share, the investor can multiply the number of shares acquired at each price by that price, add those values, and then divide the total value by the total number of shares.

Weighted averages are also used in other aspects of finance including calculating portfolio returns, inventory accounting, and valuation. 

Weighted Average Shares Outstanding

The weighted average shares outstanding figure is used to calculate key financial metrics such as earnings per share (EPS). Management and financial analysts focus on EPS because it represents the profit left over from operations that is available to stockholders. Basic EPS, for example, is calculated as follows:

 $\begin{aligned} &\text{Basic EPS}=\frac{(\text{Net Income}-\text{Preferred Dividends})}{\text{Weighted Average Shares Outstanding}}\\ &\textbf{where:}\\ &\text{EPS}=\text{Earnings per share}\\ \end{aligned}$​Basic EPS=Weighted Average Shares Outstanding(Net Income−Preferred Dividends)​where:EPS=Earnings per share​

Basic EPS = Basic Weighted Average Shares

Basic weighted average shares, on the other hand, represents the above-mentioned weighted average shares outstanding less the dilution of stock options for a specific period. For basic weighted average shares, "basic" essentially means non-dilutive.

Dilution occurs when a company issues additional shares, reducing current investors' proportional ownership in the company. Using diluted shares is more informative than using basic shares because if securities are converted into shares of common stock—in other words, dilution occurs—an investor's stake in the company, or their share of the total pie, shrinks.

Companies that have simple capital structures only need to report basic EPS. Those with complex structures, including potential dilutive securities, must report both basic EPS and diluted EPS.

The Bottom Line

A company that announces a 2-1 stock split as of a certain date doubles its number of shares outstanding on that date. It also halves the value of those shares. If that event occurs on, say, December 15th of the year, it can distort the company's apparent number of shares outstanding for the year. Calculating the weighted average number of shares resolves the problem by taking into account the length of time that the changed number was in effect.