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All of this starts with what’s known as SELLING STOCKS AND SHARE DILUTION.
This is the practice where a business issues more stock on the market for sale, in an effort to raise money at their current share price. For the company, this can be GOOD, because it means they’ll receive more working capital to re-invest…BUT, this is often done at the expense of YOU, as the INVESTOR, because NOW your shares own just a little bit less than they did before.
The concern, at THIS point, is that a company could simply be raising extra money at their investors expense, cashing in on record high stock prices and market euphoria, paying themselves larger salaries, and subsequently not providing any extra benefit for their shareholders…even though, the investors are the ones taking all the risk.
First, by doing this – a company is able to raise money at a price they NEVER would’ve ordinarily achieved.
Second, they’re able to take advantage of rising stock prices.
Even if they DON’T NEED the money – at the core, they are STILL a business – and having more cash on hand allows them more leverage and flexibility in the event they need it, with very little cost to themselves.
Third, they might be able to use that cash to acquire other businesses, or re-invest into other ways of making money.
For example, even if a company dilutes its shareholders by 10%…maybe they use that revenue to build new factories, which DOUBLE profits…and now, even though you own LESS of the company…that smaller portion is worth MORE because they’ve expanded into new ventures.
BUT…there are downsides of this.
First, you now own less than you did previously.
Because of that, you need the company to make MORE money, or go UP in price in order to make a profit…otherwise, you wind up owning a smaller piece of the pie, and a smaller piece of the profits, while the company raises money at your expense.
Second, there’s no guarantee the company will use the money appropriately.
While some have clear intentions to use the money for growth and expansion, and it could work out EXTREMELY WELL…others could simply be taking advantage of record high stock prices for their own gain…even if that means hurting their investors in the process.
And third, analysts warn that so many unprofitable companies issuing shares is a sign “that perhaps points to companies getting greedy.”
Throughout both previous points where unprofitable firms dominated equity offerings, the stock market was either at the start of a bear market, or already in one. Sundial Capital Research, who conducted this study, said that “money-losing firms are flooding the secondary market adds to a growing set of signs that point to elevated enthusiasm,” and that “When there is increased appetite for issues from unprofitable companies, it tends to mark a point of euphoria.”
At the end of the day, it’s up to that individual company to put this cash to its best use, and not take advantage of retail enthusiasm to buy whatever they can. It’s not always bad that a company wants to raise money, especially during a time like this…but, it’s what they DO with that money that matters…and, if you invest in a company, you’ll have to hold the conviction that they won’t just pay themselves bonuses…but, instead, grow your piece of the pie…and make you more money in the process.
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