What is Weighted Average?
A weighted average is a calculation used to give more weight to more influential values within a data set, and lower weight to values with less influence.
As it relates to shares of outstanding stock, the weighted average calculation gives greater weight to larger numbers of outstanding shares and longer durations and gives less weight to the smaller number of shares and shorter durations.
Weighted Average Vs Simple Average
To illustrate the difference between simple average and weighted average, suppose a company has 10,000 shares outstanding at the beginning of the year and 20,000 shares outstanding at the end of the year. Using a simple average formula, the average number of shares outstanding would be 15,000 (30,000 ÷ 2 = 15,000).
However, if the year-end share increase were due to a stock split that occurred on December 15th of the year, the 15,000 simple average result would not accurately reflect the day-to-day average for the entire year.
The following results from the calculator on this page show how the weighted average calculation more accurately reflects the day-to-day average of outstanding shares.
|1/1/13 - 12/15/13||10,000||348||95.34%||9,534|
|12/15/13 - 12/31/13||20,000||16||4.38%||877|
|Weighted average outstanding shares »||10,411|
See how weighted average more accurately reflects the outstanding day-to-day shares during the year?
How to Calculate Weighted Average Shares Outstanding
Here are the steps to calculate the weighted average of the number of shares outstanding based on durations stated in the number of days:
- Count the total number of days from the beginning date to the ending date. If the total duration is a full calendar year (January 1 - December 31), then the total number of days would be 365 (or 366 for leap years).
- For each period containing a different number of outstanding shares, count the number of days in the period (column C in the example) and divide that result by the total number of days (results in column D expressed as percentages).
- For each period, multiply the decimal result arrived at in step #2 by the number of shares outstanding during the applicable timeframe (results in column E above).
- Add up all of the results arrived at in step #3 (sum of column E in example). That sum is then equal to the weighted average number of outstanding shares.
Note that if you find yourself trying to calculate weighted average manually, it will be easier -- though less accurate -- to work with durations stated in months. In that case, you would divide the number of months in each change in outstanding shares by the total months to arrive at the percentages in column D above.