> Shouldn't these companies be able to issue stock to get some cheap capital to continue growth/hiring?
Yes, but then the stock price would go down, which obviously isn't allowed.
Yes, but then the stock price would go down, which obviously isn't allowed.
or? are you being sarcastic about c-suit not wanting 'stock price to go down'? which could be a consequence of issuing new stock?
The value of the existing company "before" remains the same, and the sale of the new shares brings cash into the company at the selling price, so those new cash assets exactly balance out the dilution of ownership.
If anything it might increase the value of the company if shareholders believe that the same "profit multiplier"/ROE will be applied to the new cash, for example if a profitable restaurant chain sells new shares to get the cash to open and operate new restaurants in new locations. Of course, changes to the share price are due to changing expectations so that will occur as information about the pending transaction is incorporated into the hive mind and not necessarily at the moment of share sales.
think about it the other way -- why would a company ever do a stock buyback if changing the amount of issued stock didn't change the price? there's a reason buybacks are considered essentially the same as dividends.
Buy low/sell high maybe? They buy their stock when the price is low and they think it is undervalued so that they can sell it later when the price more accurately reflects the value or even better when the price is overvaluing their stock.
But demand does change, because the company is expanding its balance sheet. You end up with more slices of a bigger pie.
Compare to a stock split, which keeps the pie size constant.
> why would a company ever do a stock buyback if changing the amount of issued stock didn't change the price?
The company used its cash to buy its own stock. Fewer slices of the same pie == each slice is bigger than before.
Put another way, if prospective investors wanted to buy more shares at the current asking price, they could, from an existing owner. The people who want shares but haven't bought, demand a lower price for them.
Let's say you have a company worth $2 and you have two shareholders, each with one share. So that's a dollar a share, right? Now you sell a third share for a dollar. The company that was worth $2 is now worth $3 because it has its old assets that were worth $2, and it has NOW has a dollar in cash that it didn't have before. Now it's a $3 company. This is not advanced analysis, this is simple counting. Trust me, I know how it works, I got a graduate degree in it, and you're simply wrong.
what you may be thinking of is when the company issues shares and gives them as incentives/rewards to officers/directors/employees. That does dilute ownership, but sale of shares does not.
This is a huge "when" (it should be more of an "if"), and one upon which the entire theory rests. But we can't just assume infinite demand for shares at any price. So: will people buy the new shares, at the current, pre-new-issue price?
No, they won't. The current price is too much for those people to buy shares. If those people wanted shares at the current price, they could buy them from an existing holder. They didn't, indicating they don't want to.
Thus: no people buying the newly-issued shares; means no cash going into the company; means no increase in company value. The company would need to offer less than the current price (thus decreasing the price) in order to get anyone to buy the new shares.
>Let's say [I] have a company worth $2 and [I] have two shareholders, each with one share. So that's a dollar a share, right? Now [I] sell a third share for a dollar (pronouns edited to respond)
Who would you sell it to? Who would buy that share for a dollar? I could have bought it from one of the 2 existing shareholders for a dollar. Offering a third share says to me that you're on shaky financial ground, and that your company is probably worth closer to $0 than $2. In fact, I suspect you might apply my third dollar towards executive compensation, rather than towards increasing the value of the company, and that's why "the company" needs my cash in the first place.
This is basic demand theory: there is no marginal demand for a share of your company at a price of $1. Only 2 people were willing to pay that, and they already did. I bet the new-issue antics are giving them pause, too: they'll probably offload at a loss, if anyone will buy at that point, even for pennies on the dollar. But I'll tell you what: I'll offer you 30 cents. Take it (and lower the share price to 30 cents) or leave it. Trust me, I got two graduate degrees in this ;)