What is the weighted average of shares outstanding?

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The weighted average of shares outstanding is calculated based on the volumes of various share sales and purchases over a period of time. This figure is used to determine a publicly-held company's earnings per share. Privately-held companies are not required to report earnings per share, so they do not need to calculate this number. The weighted average calculation incorporates the beginning number of shares outstanding, plus additional shares that were sold or otherwise issued during the period, minus any shares that were bought back during the period.

The number of shares outstanding can change substantially over the course of a year. For example, the board of directors might elect to buy back a certain number of shares. Or, a holder of the company’s convertible bonds may elect to convert them into common stock. Another possibility is that a corporate stock purchase program allows employees to buy a modest amount of company shares over time. In addition, employees may have been granted stock options, which allow them to buy company shares within certain date ranges. And finally, the business might issue shares to the owners of a business that it is acquiring. In a larger corporation, these factors can result in substantial ongoing changes in the number of shares outstanding, making it more difficult to calculate the weighted average of shares outstanding.

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Example of Weighted Average of Shares Outstanding

For example, a business has 1,000,000 shares outstanding at the beginning of the calendar year. It sells an additional 100,000 shares at the beginning of June, and buys back 300,000 shares at the beginning of October. The calculation of its weighted average shares outstanding for the full year is as follows:

+ 1,000,000 shares outstanding in January
+ 1,000,000 shares outstanding in February
+ 1,000,000 shares outstanding in March
+ 1,000,000 shares outstanding in April
+ 1,000,000 shares outstanding in May
+ 1,100,000 shares outstanding in June
+ 1,100,000 shares outstanding in July
+ 1,100,000 shares outstanding in August
+ 1,100,000 shares outstanding in September
+  800,000 shares outstanding in October
+  800,000 shares outstanding in November
+ 800,000 shares outstanding in December
= 11,800,000 shares in total, divided by 12 months
= 983,333 weighted average of shares outstanding

In addition, the company earned $1,600,000 of net income during the year. When divided by the 983,333 weighted average of shares outstanding, this results in $1.63 earnings per share for the year.