Asymmetric Information

Finance a la shmoop what are shares outstanding Okay first

things first this is not a qualitative assessment of shares

shares maybe bad awful mediocre good or even outstanding but

that's not what this term refers to it also doesn't

mean that they're you know out standing in the ring

paying dividends in the way that they don't do that

Sorry won't sing again Alright rather shares outstanding is a

technical term that reflects how many pieces make up the

sum total of the ownership pie of a company So

here is what baby's first chainsaw dot com looks like

it has forty million slices and is currently trading for

fifteen bucks a slice while new toddlers were so into

mechanical power tools or how sick and twisted the writers

it's from up Are you been here anyway If you

didn't catch the cleverness here a slice equals a share

so the company has forty million shares outstanding They're trading

at fifteen bucks age and that gives the company a

market value of six hundred million dollars That means that

if someone wanted to buy the entire pie they could

in theory pay six hundred million bucks assuming everyone would

Sell them all their shares for fifteen bucks each and

the shares outstanding Change Sure Bunch of factors change that

number all the time When an employee decides to either

buy out or sell the stock options granted to her

when she joined the company Well those options convert into

shares So if she had ten thousand options and sold

them the company would have then ten thousand fewer options

outstanding We're kind of like a liability but it would

now have forty million ten thousand shares outstanding The options

just converted into shares on men Okay what if the

company wanted to raise thirty million bucks to buy a

small competitors for all cash Well it could sell to

the public two million shares at fifteen bucks a pop

Did it already own those shares Well likely not They

weren't just sitting in the vault in treasury stock so

it had to print those shares out of thin air

to dot and then sell them to new buyers So

add two million to the total and now the company

has forty two million ten thousand shares outstanding It also

has thirty million bucks more in cash on its balance

Sheet by the way now there's a danger in the

increase in shares outstanding It's called share creep and it's

not this guy Rather it refers to the gradual increase

in shares outstanding otherwise known as dilution because now instead

of a six hundred million dollar valuation with forty million

shares at fifteen bucks the company if it were to

still have a six hundred million dollar valuation now it's

more shares outstanding would see its stock price drop teo

six hundred million divided by forty two million ten thousand

and yeah that gets you fourteen dollars in twenty eight

cents a share So in the process of the options

being converted and the cash being raised by selling equity

the company destroyed seventy two cents a share in value

Now in real life the market probably goes up and

makes account for all that What were omitting here is

that the company raised thirty million bucks of cash in

the process Cash that well we investors presume it will

use wisely and not on you know kibble for the 00:03:14.07 --> [endTime] office terrier