NEWSLETTER
Enter your email address below to subscribe to our newsletter.
Membership Benefits!
- Get Free Stock Picks in your email.
- Penny Stock Picks poised for growth.
- Well researched Best Penny Stocks.
- Hot Penny Stocks can make you rich!
- Get Growth Stocks.
Join now!
- Penny Stock Picks poised for growth.
- Well researched Best Penny Stocks.
- Hot Penny Stocks can make you rich!
- Get Growth Stocks.
Testimonials
"I have been geting stock picks from these guys for a while and they have been dead on for most of these stocks. Thanks for the great stocks."
John Daly
"Very helpful information in all the emails, and think these guys have the best stock picks from any other sites. Would recommend them to traders of all experience."
Jason Fink
Latest Articles
Stock Dilution - What it Means to Stockholders
Stock dilution generally arises when additional common shares are issued by a company, through second offerings, employee stock options, or by conversion into common stocks of convertible bonds and preferred shares. Usually, stock dilution results in shifting of fundamental positions of the stock, like ownership percentage, voting control, earnings per share and value of individual shares.
Let's first take a look at the effects to the number of shares when stocks are diluted. Say, a company X has 1,000 shares at $10 each share so if you own a hundred of those shares, you own 1/10 of the company. If the company X wants to raise funds and decides to increase the number of shares by another thousand, and you didn't buy any of those additional shares, your stake in the company is thus reduced to 1/20 (100 out of 2000). While your money stake is fundamentally unchanged, the stock dilution effectively diminished your ownership percentage by a hundred percent (from 10% to 5%). In simple terms, you get a smaller piece of a bigger pie.
The dilution also results in reduced earning per share (EPS). If year-end income of company X is $1000, then your EPS is $1 per share, or $10 total earnings. However, in the diluted scenario, your EPS would be diminished to just $0.5 per share or $5 total income. So you get less for your shares when dilution is done.
But stock dilution is not at all times a negative action. If the shares in company X are intrinsically overvalued (i.e., they are worth much less based on actual assets and holdings of the firm), they are usually used as payment for company acquisitions. Say Company X opts to buy company Y which has 100,000 issued shares at a fair market value of $1 per share. Company X issues 1,000 additional inflated-value shares as payment for the $100,000 owed to the owners of company Y, resulting in the total shares of company X jumping to 1,100 from the initial 100 shares. Your share of the merged company is now less than 1%, but looking at the larger picture, the resulting assets and holdings of the new company is much bigger. In simple terms, you may get a smaller slice of the pie with the dilution, but it is a much longer piece as this time you also get a piece of the action from company Y.
Another scenario worth mentioning is when the price of the stock rises for some reason (even if it is only due to rumors), for example in anticipation of a product that is widely popular. The company may issue shares publicly and sell these shares at the current market prices. If the company X is able to sell 10,000 shares at $20 apiece, it earns $200,000 in cold cash, raising not only the total shares to 11,000 but the intrinsic value of those shares as well. Your 100 shares in the company are now worth almost $2,000, twice as much as it was before.
To summarize, the context of a stock dilution determines whether it's beneficial to a stockholder or not. Generally, employees stock options and bonds conversion are disadvantageous to outside shareholders while management actions that result in better positioning for the company usually turns into benefits for all the stakeholders.
Let's first take a look at the effects to the number of shares when stocks are diluted. Say, a company X has 1,000 shares at $10 each share so if you own a hundred of those shares, you own 1/10 of the company. If the company X wants to raise funds and decides to increase the number of shares by another thousand, and you didn't buy any of those additional shares, your stake in the company is thus reduced to 1/20 (100 out of 2000). While your money stake is fundamentally unchanged, the stock dilution effectively diminished your ownership percentage by a hundred percent (from 10% to 5%). In simple terms, you get a smaller piece of a bigger pie.
The dilution also results in reduced earning per share (EPS). If year-end income of company X is $1000, then your EPS is $1 per share, or $10 total earnings. However, in the diluted scenario, your EPS would be diminished to just $0.5 per share or $5 total income. So you get less for your shares when dilution is done.
But stock dilution is not at all times a negative action. If the shares in company X are intrinsically overvalued (i.e., they are worth much less based on actual assets and holdings of the firm), they are usually used as payment for company acquisitions. Say Company X opts to buy company Y which has 100,000 issued shares at a fair market value of $1 per share. Company X issues 1,000 additional inflated-value shares as payment for the $100,000 owed to the owners of company Y, resulting in the total shares of company X jumping to 1,100 from the initial 100 shares. Your share of the merged company is now less than 1%, but looking at the larger picture, the resulting assets and holdings of the new company is much bigger. In simple terms, you may get a smaller slice of the pie with the dilution, but it is a much longer piece as this time you also get a piece of the action from company Y.
Another scenario worth mentioning is when the price of the stock rises for some reason (even if it is only due to rumors), for example in anticipation of a product that is widely popular. The company may issue shares publicly and sell these shares at the current market prices. If the company X is able to sell 10,000 shares at $20 apiece, it earns $200,000 in cold cash, raising not only the total shares to 11,000 but the intrinsic value of those shares as well. Your 100 shares in the company are now worth almost $2,000, twice as much as it was before.
To summarize, the context of a stock dilution determines whether it's beneficial to a stockholder or not. Generally, employees stock options and bonds conversion are disadvantageous to outside shareholders while management actions that result in better positioning for the company usually turns into benefits for all the stakeholders.
Featured Links
Copyright © 2008 zeba5 LLC