Weighted average stock options

Founded in by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services. When a company calculates its earnings over a certain period of time, it divides its profits by the number of outstanding shares. However, companies' outstanding shares can change over time as a result of newly issued shares, repurchased shares, exercised employee stock options, or several other reasons.

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To most accurately reflect its earnings per share, we need to know how many shares there were during the entire period -- not just at the end.

To do this, we need to calculate a weighted average of the company's outstanding shares over the time period. What is a weighted average?

A weighted average is a way of taking the average of several numbers when a different "weight" is assigned to each one. A common example of a weighted average is calculating a grade point average for courses with different numbers of credit hours. In most schools, an "A" is worth four grade points, a "B" is worth three, and so on. However, what happens when a student receives an A in a four-credit course and a B in a two-credit course?

Weighted Averages and Equity Compensation : The NASPP Blog

You can't simply average the A and the B to arrive at a 3. In this case, the credits become the "weight" used to determine the GPA. When we do this, you arrive at a GPA of 3. At the beginning of the year, the company has , shares outstanding but issues an additional 50, halfway through the year, for an ending total of , After all, some of those earnings happened when there were fewer shares.

Bear in mind that this is a simplified example, and a company's number of outstanding shares can change several times during a year. However, the calculation method is the same as this chart. A clearer picture of earnings To sum it up, a weighted average of a company's outstanding shares gives a more accurate picture of how much a company earned for its investors over a specified time period.

Calculation of Fair Value of Stock Options for Charlotte_Russe_Holding (CHIC)

It takes into account changes in the company's outstanding shares over time and better reflects how much profit the company produced per share. This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular.

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How to Invest Learn How to Invest. Personal Finance Credit Cards Best Credit Cards of Best Credit Card Sign-Up Bonuses Best Balance-Transfer Credit Cards Best Travel Credit Cards Best Cash-Back Credit Cards Best No-Annual-Fee Credit Cards Best Small Business Credit Cards. How to Calculate a Company's Weighted Average Number of Outstanding Shares By calculating a company's weighted average number of outstanding shares, we can get a more accurate picture of its earnings.

Shares Outstanding Portion of Year Weighted Shares First six months , 0. How to Invest in Stocks. Prev 1 2 3 4 Next.