Common Stock Classifications

Lesson:

Investors should understand the concept of common stock. Each share of common stock provides its owners with a partial ownership of a company. The more shares owned, relative to the pool of shares that have been issued, the greater the degree of ownership by the investor.

There are three categories of stock that should be well-understood by investors:

  • Issued - The number of shares that have been sold by the company
  • Outstanding - The number of shares that are currently held by investors
  • Treasury - The number of shares that are currently held by the company

Treasury stock is a little strange. It does not earn dividends. It just exists, ready to be retired, or sold again.

Being able to derive the number of shares in one category from the other two is a critical skill for any investor. It will help him weigh the cost of a share against its claim on the company's net assets and future income streams.

The basic equation is as follows:

ISSUED = OUTSTANDING + TREASURY

Neptune ltd., the infamous mask designer, has 26 treasury shares. There is a total of 34 shares outstanding.
How many shares are considered shares issued?

Answer:

  • There are 60 shares issued

Explanation:

  1. Remember the formula
    SHARES ISSUED = SHARES OUTSTANDING + SHARES TREASURY
  2. Now plug in the numbers
    60 = 34 + 26
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