A stupid question about stocks?

We're told that stocks can be diluted anytime. Is that true? If so, is that the same as the federal reserve pumping new money into the market to cause inflation?

In other words, are all paper investments (like money, stocks and things that depend on it) essentially valued to the issuer's expansion and contraction (rather than exchanges within the market demand).

"However, initially, the stock goes down as people look at it as dilution. For most companies, they eventually regain the lost share value"

Ok, so is it theoretically possible that the company knows it will lose either way, or doesn't care about the stockholders that they'd dilute their stock to screw people over?

With regards to stocks, the whole idea of issuing stock is that a company receives money for it.

When an established company decides they need more cash, they issue stock of bonds. In theory, this increases the amount of cash, increases the value of the company, and the stock price SHOULD stay the same. However, initially, the stock goes down as people look at it as dilution. For most companies, they eventually regain the lost share value.


TO your added comments
The company's objective is to continue/improve operations. Most of the time, the only way to do that is to raise more money, and the only LEGAL way to do that is through a bond issue or a secondary offering...........nobody gets 'screwed over'. It is the way business is done.

It is not exactly the same as the government printing more money. When the government prints more money the relative value of the dollar does drop as indeed it has been doing for many year. The government does love inflation. It makes paying their dept obligations relatively painless. But there are in fact similarities.

When a company sells more shares the earning per share drops as indeed the value of the dollar drops when the government prints more. The difference hopefully ends there but not necessarily. Assuming the company invests the money from the sale of shares wisely, then over several years it will increase the shareholder return. Unfortunately, that does not work out all of the time. In fact it works out that way only about half the time. Company management many times has a tendency to waste money just like the government has a tendency to waste money. The big difference is the companies have a balance sheet and income statement so their failings tend to show up over time. Governments do not but their failings also do show up over time. Too bad our offspring will be paying for those failings.

Most stocks have convertible securities outstanding. Such as preferred stock or options held by employees, that can be converted to common stock at the holder's discretion. When that happens the number of outstanding shares increases. Keep in mind that a key statistic many investors look at is EPS. If the number of shares increases, then EPS will decrease. On Yahoo, Finance under key statistics, you will see "diluted EPS". That is what the EPS would be if all convertible securities were acutally converted. If it is less than the undiluted EPS you know the potential for a noticeable dilution exists.

you bet ye.

A stock can be diluted if the management of the company issues new shares (thereby reducing the ownership stake that each existing share of company represent.) This generally occurs when:

1) A company needs more capital. Issuing stock is one way to raise money.
2) When employees cash in stock options. Stock options are a standard (if often problematic) way of paying workers and ensuring that the interests of employees are in line with those of the company.

Ultimately the long term factor that drives share price is the performance of a company--generally if earnings continue to go up the stock will too. It would be possible for a company to harm its stock performance by pumping out too many stock options.

You cannot compare the Federal Reserve to a particular company's stock float. Float is the number of shares issued and outstanding in public hands. That excludes any insiders or promoters. A stock is diluted when more shares are issued to other shareholders that are the same class as those that are already outstanding. For instance, some companies may allow dilution so that a certain group will lose a majority ownership (51% or more) and management can take more control over decisions of the firm.

Dilution also works to give present day shareholders the right to acquire more shares at a reduced rate. In general, most companies offer "rights of first refusal" to present day shareholders in the event of a new stock issuance. Should the shareholder of record refuse to purchase additional shares in order to avoid dilution of their equity stake in the company, then they screw themselves. Public companies generally will offer first refusal rights to stockholders of record as of a certain date.