Where does new stock come from that gets issued by companies?

[bond21]

When a company decides to issue new shares to raise equity, where do these new shares come from?



I don't understand this...if the total sum of outstanding shares equals the total company, how is it possible to create more shares and then sell them to increase shareholder equity? Where are the shares coming from?

 

[Value Collector]

When a company decides to issue new shares to raise equity, where do these new shares come from?



I don't understand this...if the total sum of outstanding shares equals the total company, how is it possible to create more shares and then sell them to increase shareholder equity? Where are the shares coming from?

The new shares are just created with a stroke of a pen.

eg.

IF company XYZ had 1,000,000 existing shares on issue, but needed to raise $1,000,000 to buy new equipment or some other investment, they would sell 1,000,000 new shares at $1 each, so the total number of shares on issue increases by 1,000,000 to 2,000,000, and their cash at bank increases by $1,000,000.

 

[Value Collector]

if the total sum of outstanding shares equals the total company, how is it possible to create more shares and then sell them to increase shareholder equity?

So the total company used to be represented by 1 Million shares, so the owner of those 1 Million shares owned 100% of the company, But after the issue of the new 1 Million shares increases the total number of shares to 2 Million, the owners of the original 1 Million only own 50% of the company.

Picture this,

You own a pizza shop, your total ownership interest is represented by 100 shares, But even though your pizza shop has all the equipment, it is about to go bankrupt because you have no cash to buy stock or hire staff.

So I come to your aid, you do a capital raising where I inject $200,000 into the pizza shops bank account and the pizza shop company issues me 100 new shares, so now there are 200 shares existing, which are your original 100 and the 100 new ones issued to me, You no longer own 100% of the pizza shop, we now own 50% each, of the new larger enterprise that has $200,000 in the bank.

We Take the $200,000 buy all the stock we need, hire staff, buy uniforms, and pay for a local advertising campaign, Hopefully the business comes good, and you own a 50% interest in a successful enterprise rather than 100% of a bankrupt one.

 

[darkhorse70]

VC is that a rare thing to happen? I thought they offer x amount of shares to existing holders to even out dilution?

 

[burglar]

VC is that a rare thing to happen? I thought they offer x amount of shares to existing holders to even out dilution?

In the event that shareholders are not offered anything, they can buy on market (sometimes at better price).

Dilution is a fact of life.

If the funds are used to improve the company's position, there is no noticeable dilution.
If, however, the directors vote themselves a Xmas p!ssup then ...

From Investopedia:

... dilution

DEFINITION OF 'DILUTION'
A reduction in the ownership percentage of a share of stock caused by the issuance of new stock.

 

[Smurf1976]

Existing shareholders may be offered an opportunity to buy more shares, possibly at a discount to what others would pay, but it's still dilution given that you need to invest more cash in order to maintain your % ownership of the company.

 

[Value Collector]

VC is that a rare thing to happen? I thought they offer x amount of shares to existing holders to even out dilution?

Sometimes existing shareholders can participate, but not always, In a lot of cases it's only offered to large institutions.

If it is done for the right reasons, and at the right prices shares holders should benefit. If it is done at incorrect prices and for bad reasons share holders value will be diminished.

I generally don't like capital raisings.

But if you look at my example of the pizza shop, they original owner didn't really suffer dilution, because his position is now better.

 

[darkhorse70]

Thanks VC. Makes sense. It would be hard for a tech trader to understand what value it gave. For me it would just be an undefined risk but it could be worth while in the long run for a fundamental trader.