Learn The Stock Market And How to Trade

Let’s Trade Stocks Knowing How Many Are Actually Out There

This post is in follow up to a comment on a previous post about Issued Shares. 

 

In the comment Thierry wrote:

thank you for your website , i like to learn more
my question is : sometimes , looking at a stock in yahoo finance , i notice that they show institutions owing 110% or 120%
can you explain this ?????
how is it possible to own more than 100 %
and what is it ???? can you explain more about the float ????
i am confused and lost

Thank you Thierry for reading the site and taking the time to question, let’s see what we can do to answer.

Authorized Stock

The authorized stock is where it all begins.  When a corporation is formed the board of directors votes the number of stocks that will exist representing ownership in the corporation.  We’ll start Thierry’s Super Awesome Company (TSAC) and decide to authorize 1000 shares.  Thus the authorized stock is 1000.

Restricted Stock

Now you decide to give the high mucky mucks of your company 300 of these shares.  This is one example of the restricted stock.  Restricted stock can’t be traded on the open market but is subject to ruling by the SEC.  Insider ownership and affiliated ownership are the shares generally under these restrictions.  Restricted stock is also called letter stock or section 1244 stock named after the SEC regulation governing them.

In this example Inside Ownership would be 300 restricted shares / 1000 authorized shares or 30% or the insiders have 30% of the vote of the whole vote.

The Float

Now it’s every young corporation’s dream time - the initial public offering (IPO)!  Being conservative you don’t want the company to risk hostile takeovers so you and the board decide to maintain the majority of shares in the treasury - or 501 of the authorized shares.  Since the insiders own 300 shares, this leaves 199 shares for the open market.  These 199 shares are known as the float.  The float consist of the shares that you and I commonly get to trade.

Outstanding Shares

The outstanding shares are simply the float and the restricted stock added together, or the shares outside of the corporations direct control.  In our example TSAC’s outstanding shares is 300 (restricted stock) + 199 (float) = 499 outstanding shares.

Learning These Stock Classifications Can Help With The Bigger Picture

Alright, let’s try to put this all together.

Authorized Stock (1000), Restricted Stock (300), Float (199)

Thierry’s Super Awesome Company decides at a quarterly meeting to offer 100 shares in stock options to some of its executives (which we’ll say they will exercise) and buy back 50 shares.  Now the restricted stock changes to 400 shares (300 + 100), the float changes to 149 shares (199 - 50), the outstanding shares changes to 549 shares (499 + 100 - 50), and the shares in the treasury changes to 451 (501 - 100 + 50).  How does this change your view of the company as an investor?  You may like the increase in insider ownership, or dislike the fact that the corporation no longer owns the majority of the shares in the treasury, or you may not like that there is less shares on the float which could increase volatility, or you may not like the fact that there is 10% more outstanding shares spreading the dividend returns.  Share allocation can affect a lot of things and you need to digest how it fits in your trading or investing strategies.

All That to Answer Your Question

How is it that insider’s can hold more than 100% of the shares?  There are multiple answers to this question, hopefully one of them fits the situation you are asking about right now. 

1. Check which shares the data is talking about.  In our example Insiders own 30% of shares by authorized shares (300/1000); 60.1% of outstanding shares (300/499); or 150.8% of the float (300 / 199).  I’ve seen all these different divisions used in reporting, be careful especially in an analysis of an investment with what the author’s bias may be when talking about percentages.
2. Short Selling- Assume Company XYZ owns all of TSAC’s restricted stock (300 shares).  However, Joe Bear shorts 200 shares.  When someone shorts a stock the shares are actually sold from someone else’s shares to another person with a promise to buy them back at a later date (hopefully at a lower price.)  So Joe sold 200 of XYZ’s shares to company ABC.  Reporting time comes around and XYZ shows owning 300 shares still while ABC now reports 100 shares.  In reality though the outstanding shares hasn’t changed (499) but in this case insider ownership would show 100.2% of the outstanding shares (500 / 499 ).  If you see insider ownership over 100% you also may wish to check the short selling information.
3. Reporting Error - From my understanding there is approximately a 4 week delay on reporting for insider ownership.  This may lead to the potential of one company reporting just before selling a large portion of shares and another company reporting just after buying these restricted shares.  If XYZ sells 250 shares after reporting; then ABC buys them before they report the final data may show restricted shares (300 + 250) / Outstanding Shares (499) = 110.2%

Well I hope this helps clear up some confusion on different types of market shares.  Keep commenting - I’ll try to keep the post coming.

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