A Question on Stocks


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I'm generally interested in how economy works, because i think it closely relates to businesses. I would like to ask something about stocks. Imagine that there is a company with 100 stocks. Now, the owners are like :

Owner1 has 40 stocks

Owner2 has 30 stocks
Owner3 has 20 stocks
Owner4 has 8 stocks
Many owners, say Owner5, have 2 stocks (could be employees).
Now, the question is, what is the process happening when maybe Owner1 and Owner2 decide that it would be a good idea to increase the stocks of the company.

Now, if i understand well, raising stock would be a nice way to get some more money. However, raising stock would also affect the ownership percentage of all existing parties, since more parties would be involved. So :

Why would owner5 accept that ? It would lead to his shares having a lower value. I understand that there may be clauses where his stocks can be bought back, but what if not ? What if he decides that he does not want to jeopardize his current stocks ? Also, Owner1, as probably more rich, could be buying the new stock, thus increasing his company share. Why would owner5 allow that if the company is profitable ?

The only point i see is that of receiving some direct money(2% of the new stocks), but does it really work this way ?

Investors Stock Options Economics

asked Jun 6 '11 at 17:51
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Spyros P
132 points
  • "Why would owner5 accept that ?" Why would owner1 accept it? Based on your scenario the pros and cons are the same regardless of the number of shares held. – Gef05 9 years ago

2 Answers


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That's one of the reasons for a shareholders agreement - to determine dilution, sale of shares, buy-back clauses, etc. The person in the company with the largest number of shares generally can dictate the terms of the agreement. Often this will mean that shareholders with less than a certain percentage get no say in dilution, and have to accept the reduction in the percentage of the company they own.

That being said, usually the purpose of dilution is to increase the amount of capital in the company. As a result, the value of the company as a whole should be going up, and even when divided among a larger number of participants, will still increase the value of their holdings. 2% of $100 isn't worth as much as 1% of $1000.

answered Jun 7 '11 at 02:28
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Elie
4,692 points

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Check out my answer to this similar question: What's the catch in an offer for share?

answered Jun 6 '11 at 20:56
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Giles Thomas
1,540 points
  • ahh, so it's more or less close to what i wrote on the question right ? Thanx :) – Spyros P 9 years ago
  • Pretty much. But the important bit is the reason why it's OK to be diluted. If the company issues more shares and sells them, then it gets cash for them. The company is now worth more because of that cash, so while your *percentage* ownership might go down, the value of what you own will hopefully go up. To put it another way, you have a smaller piece of a larger pie. – Giles Thomas 9 years ago

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