Does Dilution Affect my Shareholding?
Introduction
A listed organisation has the option of diluting shares if it needs more funds. But, the new stock issuance will affect both the organisation and existing shareholders. Once you register a company, you need to understand dilution and how it can affect shareholding.
Let’s discover what dilution is and why businesses do it. Also, this article explores the causes and effects of dilution on shareholder value. Keep reading to learn more.
What’s Dilution?
Dilution involves the reduction of the equity percentage in an organisation through issuing additional stocks that will be auctioned. Dilution takes place when the existing equity percentage of shareholders in a firm is reduced, allowing the freed-up stock to be utilised for raising capital.
The company’s stock ownership is initially divided among investors, while the remaining shares are reserved for public trading. And they’re referred to as public floats. When a company’s listed stocks are made available through a secondary offering, the share split number in the firm increases.
In most cases, the funds generated are utilised to boost the growth of the firm or settle already existing debts. Let’s look at a recent example of stock dilution.
Amigo, a UK guarantor loan company, was required by the High Court to raise funds to settle a consumer case regarding its business practices. One of the options that this company used to raise money was share dilution.
Why Do Organisations Dilute Shares?
Organisations dilute shares because of several reasons, which include the following:
- Organisations decide to dilute stocks to raise extra capital through secondary offerings. The additional capital generated is directed towards expansion opportunities or settling existing debts.
- The board or staff may be granted securities that could be changed to common stock shares.
- Some firms dilute their shares to introduce new stockholders into the holdings as a trade-off for acquiring the company.
- An organisation can dilute its stocks as a result of meeting certain standards stipulated by compliance to qualify for a given benefit or raise valuation.
- Share dilution has the potential to result in higher dividends despite the addition of more stockholders. This depends on how the organisation utilises the funds raised and its expansion and success over a given long-term period.
How Does Dilution Affect Shareholders?
A share is a claim on an organisation’s equity. If a company issues more shares, the existing stockholders’ ownership of the firm will be minimised as a consequence. That means two things, which include:
- Possibly decreased dividends
- Fewer voting rights
Share Dilution and Voting Rights
Your stake as an investor in an organisation represents your power to vote and decide the direction the company will take. More shares mean you have greater power to vote. When your stock ownership in an organisation decreases, the power to vote diminishes.
Share Dilution and Dividend Payments
As the number of stockholders added to the organisation increases, the dividends will be split further and awarded based on your share percentage. And when it comes to existing stockholders, EPS (earnings per share) will reduce if the share number increases and the revenue remains stable.
How Does Share Dilution Affect Stock Value?
Share dilution can result in huge alterations to the firm’s long- and short-term performance. The negative or positive dilution consequence depends massively on how investors view the main reasons for raising funds.
Diluting stocks can also be a springboard that slings a business back to prominence over a long period. In this case, stock dilution means that the firm doesn’t go insolvent and can enhance its business practices to be more profitable in the future.
