RE: Dilution23 Apr 2020 14:21
Ok let’s deal with the placing issue and even dilution, hopefully once and for all. Let’s go back to our kindergarten years- ok primary school, not be insulting, lol:
Teacher: Why do companies list on stock markets?
Pupils: to raise money.
Teacher: who from?
Pupils: shareholders.
Teacher: why do shareholders put their own money into a company?
Pupils: so the company grows, makes profit which the shareholders then share (“that’s why they are called shareholders, Miss”, shouts one from the back of the room)
Teacher: What is dilution?
Pupils: err it’s when the company place additional new shares to the existing shares of the company, which nominally reduces the value of the current shareholders.
Teacher: so are current shareholders losing out then?
Pupils: it looks that way but it’s not necessarily the case Miss. because the resulting lower value of the sp it’s like the current shareholders are financially still contributing to the company growth but instead of using additional money from their pocket, they are using some of their shares instead. So company is saving them real cash.
Teacher: how, I don’t get it. Can you explain further please?
Pupils: let’s say prior to the placing I had 10000 shares. After the placing, the value of 10000 now would be equal to the value of 9000 of my old 10000 shares- if the share price remains static or goes down, but sometimes it actually goes up. So in effect I helped the company continue to grow with the value of 1000 of my old shares, although I still have my 10000 shares, but that’s in the case of sp falling. In a word, dilution is like when shareholders first invested with their cash, but this time it’s with some % of the value of their shares. Yes, as simple as that Miss, I don’t understand why mummy and daddy are arguing about it every night, leaving our dinner to burn in the oven. They shouldn’t have invested in the 1st place.
Teacher: Well done well done, an interesting way of looking at dilution!! So what effect will that have on the (current shareholders) share price? maybe some didn’t get that very clearly.
Pupils: it depends on what the new money will be used for Miss. the share price can go up or down.
Teacher: Can you please explain more?
Pupils: If the money is used to grow the business, the sp will go up...and vice-versa.
Teacher: how, when the dilution is supposed to diminish of the value of the shares?
Pupils: Miss, as the company grows the business, it will make more profits, a value which is then reflected in the share price.
Teacher: Well done!!!! Can you give an example, please?
Pupils: ASOS share price went up 34% on their placing day. Another example, my parents are invested in a company called Avacta. It has a test that the whole world needs to control the spread of the coronavirus..... to be cont
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