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A new share issue: why it hits existing owners

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Automated material · TradeAlmanac editorial deskPrepared by a language model from our stored data and checked by an editor.

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A new share issue: why it hits existing owners — Stocks

A new share issue creates additional shares. The company raises capital without borrowing and without paying interest. The bill goes to existing shareholders.

The mechanics of dilution

Before the issue you owned a certain share of the company. After it the number of shares has grown while yours has not — so your share has fallen.

Along with the stake, the profit attributable to your share falls too, and so does the future dividend per share.

When it is justified

When the money raised goes into a project that will lift profit by more than the share count grew. Then earnings per share ultimately rise despite the dilution.

Pre-emptive rights

Existing shareholders are usually offered the right to buy new shares in proportion to their holding. Exercise it and your stake survives; decline and you are diluted.

The right runs for a limited window — Corporate events: what a holder has to track.

How it shows up in the accounts

Through the growth of the share count in the earnings per share calculation. A company whose profit grows while earnings per share stand still is most likely diluting its shareholders regularly.

The denominator being diluted is Equity: Sberbank's currently stands at 8 628 000 000 000. A share issue raises it by the amount raised while dividing it among more shares, and the question is always which of the two grew more.

Related: How to read the income statement and Market capitalisation and free float: two different sizes of the same company.

The opposite operation

A buyback works in the other direction — Buybacks: the quieter alternative to a dividend.

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