Welcome back, don’t forget to check out last weeks edition of stock market investing mistakes part 3 if you happened to miss it.
Today, we’re going to continue on our discussion of the worst possible mistakes that you can make in the stock market. These aren’t the obvious errors that you might have heard about, but rather simple blunders that people tend to make over and over again. It pays to know as much as you can!
What Is Stock Dilution?
Let’s talk about dilution. Stock dilution is what happens when a company issues too many shares, and begins to undervalue the Investments held by their original shareholders.
For instance, imagine that you knew of a hot stock, and the company was selling shares left and right. You might want to jump on it, assuming that it was soon going to experience an upward climb. You might well be right.
However, there’s always the need to look out for stock dilution. If the company in question begins to issue too many shares, they’re going to cause dilution, and then the shares held by everyone will see their relative value plummet, even if the actual value of the company continues to climb.
Dilution also brings up the issue of convertible debt. If the company issuing too many shares does eventually begin to go into debt, they would be very likely to convert any Investments you held with them into common stocks with a set value. Clearly, this could interfere with your dreams of making a grand profit.
Look Out For Companies Repurchasing Stock
So, when you’re looking at Investments, always be sure to try to find companies who are actually trying to repurchase stock! It might seem counterintuitive, but the fewer shares there are on the market, the bigger your slice of the pie and the higher your earnings per share will end up being.
Besides, a company interested in buying back shares is a company committed to the impeccable management of its finances, and you can always take that as a sign of good management, and a good future.
See you next week for part 5 of Stock Market Investing mistakes.
Sean Rasmussen
The Bullhunters Guide
Universal Wealth Creation © 2004 – 2009
{ 4 comments… read them below or add one }
I’ve been reading along for a while now. I just wanted to drop you a comment to say keep up the good work.
Traps for young players eh? I like the last paragraph as it seems the better way to go – indicative of management qualities and their commitment to the company.
Hi Sean,
I’m glad I’m reading your blog. I would have thought that a company that was selling their shares was just trying to raise some quick capital. I wouldn’t have even considered that there might be a problem.
Thanks for the tip on companies re-purchasing their stocks. I’ll be on the lookout for those.
This is very helpful for people to understand why companies issue more stocks. I know that this can happen as a result of a merger of two or more companies.
Yes, companies wanting to buy their stock back is a good sign although many people perceive that as being that the company is in trouble and willingly sell their shares. I have seen this happen.