stock split vs dilution - Stocktrades Canada

hi there, are the terms ‘stock split’ and ‘stock dilution’ interchangeable? I own a security with 7.8M common shares reserved for issuance. the share price has more then tripled in value over the last 12 months following some high profile acquisitions. the company is now holding a vote to increase the number of common shares to 22.5M.

i’m trying to do some research to better understand what the implications might be in the short and long term. So far, what I have been able to gather is that if this is a stock split, it signals confidence in the company’s ability to grow, which may result in the share price continuing to increase. Some other articles i’ve read have concluded that all things being equal (fundamentals and profitability), the share price of the existing shares should fall – although this doesn’t always happen in real life.

I owned some TESLA shares just before the 2020 split, and following that event the stock price continued to increase.

Is there a rule of thumb when interpreting these events, i.e., always bad in the short term, good in the long term, or is that too simplistic of a lens and it really just depends on the unique attributes of each individual company/security?

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Asked on May 25, 2021 4:42 pm

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Thanks a lot Dan. dropped you an email. Paul

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Posted by Paul Obara

Answered on May 25, 2021 7:58 pm

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Stock split and stock dilution are not interchangeable no.

Think of it this way. If you own 100 shares of a company worth $10 a share and they decide to split their shares in half, you will now own 200 shares of a $5 stock. In both situations, you own $1000 worth of stock. This is a stock split.

Dilution is when they add more shares, but your overall stake in the company decreases. Say you own those same 100 shares and the company has a total of 1000 shares issued. You own 10% of the company. If the company issues 100 shares, you now own 100 of 1100 total shares, or 9.09%. You have now been diluted because of a share offering and own less of the company. This can be a good thing if used sparingly to drive growth. This is because companies can use the money raised from the extra shares for things like acquisitions. But if overused, it can really agitate shareholders.

It really depends on the company. I’d need to see what is actually going on to comment at all on what’s good or bad. Care to drop the ticker symbol here? If for whatever reason you don’t want to, you can always email it to me.

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Posted by Dan Kent

Answered on May 25, 2021 7:32 pm

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