What is Dilution? What is a R/S?
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-'Dilution' is the issuance of additional shares to the 'outstanding share count'. While not such a bad sounding definition, the impact of dilution can ruin a shareholder's position in a stock. The additional shares effectively 'dilute' the value of all shares on the market. Think of it like a pizza. The pie represents the market valuation of the company, while the slices represent the individual shares of the company's stock. When the company sells new shares, the pie doesn't get bigger, the slices simply get smaller. The investor is left with smaller slices.. or.. cheaper shares. Or if you want to think of a swimming pool vs. coffee cup model, dilution is like making the cup/pool wider. The increased capacity causes the liquid level, or price, to drop. The direct effect of selling new shares can often be far more damaging than the proportional increase in shares or warrants. Selling shares on the open market drives down the price; supply is increased, while demand stays the same. Without care a company can send their stock into a dilutive spiral that is very damaging to shareholders. The purpose of dilution is for the company to raise money, plain and simple. In the grand scheme, the purpose for a company to go public in the first place is to provide a means for raising capital. You must find companies that do so in a responsible manner, without hurting shareholders. Always keep this in mind when trading any stock, and you will fall victim to dilution far less often. What is a 'Reverse Split'? -A 'Reverse Split' (or R/S, RS) is a method by which a company reduces the number of shares on the market and increases the stock price proportionally. Reverse splits are done at a specific ratio: ie - 10 for 1, or 10:1. This ratio would mean that if a shareholder held 1000 shares at 1 cent, after the reverse split the shareholder would be left with 100 shares at 10 cents each. The value of the position does not change from the reverse split... at least not directly from it.
Companies usually do a reverse split to increase the price of the stock to more attractive levels, or to remain at a minimum price for a particular exchange. While not necessarily a bad thing (but usually a bad thing), an R/S is a popular method that bad penny stock companies use to continue raising capital through dilution. 'Dilution', if done enough, will eventually leave a stock virtually worthless. The price may go as low as .0001 dollars, the minimum that stocks are tradable by common investors. At this point the company can no longer effectively raise capital by selling more shares. By performing an R/S, the number of shares on the market decrease, and the price increases back to a "dilutable" level. The dilution starts again, and the cycle can continue over and over. Because of this, a black cloud is associated with the R/S. They normally result in a large selloff by remaining shareholders, causing the price to plummet, and the shareholder value to follow suit. A reverse split is very rarely an opportunity for a safe investment, and certainly not a wise choice for a beginner in penny stocks. To protect yourself from purchasing the stock of a company with a history of abusive reverse splits, check out Google Finance and look at the stock chart where each R/S is noted.
Here is a great page to check out to see how all of this works against you, https://seekingalpha.com/amp/article/3488956-titanic-ten-exposing-10-related-otc-stocks