Weighted average shares are measurements used to determine the average number of stock shares that a company has outstanding over a specific period of time. This is an important determination, since it affects how a company’s earnings per share, a key benchmark for investors and analysts, is measured. Calculating the weighted average shares is necessary whenever a company either issues new stock or buys back some of its outstanding shares. Making this measurement requires first multiplying the amount of shares outstanding in each time period by the percentage of the total time period those shares were outstanding, and then adding all of the totals together.
Companies that offer stock to investors rarely keep the same amount of shares outstanding for extremely long periods of time. In some cases, it might want to raise money for operations by selling some shares. By contrast, a company that is flush with extra money might want to buy back some of its own shares. All this buying and selling keeps the amount of outstanding shares fluctuating, which is why the weighted average shares computation is necessary.
As an example of how weighted average shares works, imagine that a company wants to figure out this number for the past year. They started the year with 1,000 shares outstanding. At the beginning of April, they bought back 500 shares, leaving 500 outstanding. On July 1, they issued 1,000 more shares of stock, meaning that there were 1,500 shares outstanding. That is where the number stayed for the remainder of the year.
Since there were 1,000 shares outstanding for three months and then 500 shares for another three months, these two totals must be multiplied by 0.25. This is because three months is one quarter of the 12 months in a year. The 1,500 shares that were outstanding for the last six months are multiplied by 0.5, since six months is half the year. Those multiplications leave totals of 250, 125, and 750, and adding these up means that the company’s weighted average shares for the year are 1,125.
Knowing the weighted average shares makes figuring out the earnings per share for a company much more accurate that it would be if the company simply used one of the shares totals from a certain point of the year. In the example above, the earnings would look quite different if they used the April total of shares instead of the weighted average. Since earnings per share is a huge indicator of financial strength, accuracy is crucial.
