An investor usually uses common stock outstanding to determining the value of each share of a company, but he may not realize that these shares do not represent all the stock issued. The differences and ratio between common stock outstanding and issued allow investors to identify undervalued and overvalued companies.
A company will authorize the creation of new shares to fund its operations or expansion and will then issue the shares to investors who pay the entity money in exchange for partial ownership of the company, according to Accounting Coach. Investors refer to these shares as outstanding. While the amount of stock outstanding can equal stock issued, this rarely occurs with publicly traded companies.
Most corporations have issued more stock than investors can purchase, because sources of common stock issued can include stock held by the company called treasury shares, newly created shares created by the company to raise funds, employee stock options and bond obligations. These sources usually make up a small percentage of the total stock issued.
Common stock outstanding, referred to as undiluted stock, does not necessarily provide an accurate measurement of the value of a stock when an investor determines whether he should purchase shares of a company. Investors should add all potential sources of stock issued to the value of each outstanding share, referred to as the fully diluted share price.
A company that has significantly more stock issued than outstanding can be a good investment if this discrepancy is due to a history of stock buybacks or new stock issues due to rapid expansion of the company. On the other hand, a company with large amounts of issued stock presents a risk to investors if employees decide to cash in stock options or the company decides to sell off the lion’s share of its holdings, because these actions can cause the individual share price to plummet, according to Joe Hadzima of the MIT Sloan School of Management.
Investors who own shares of common stock outstanding have voting rights and receive a quarterly dividend if the company shares a portion of its profits. Other types of common shares issued, such as treasury stock, do not carry these same privileges, because employees and corporations already receive the privileges of stock options and corporate control.