How does stock dilution work in relation to share volume?
Here is an example for you. We have a fictional company. It's called MoneyCorp. Its job is to own money, and that's all. Right now it owns $10,000. It doesn't do anything special with that $10,000 - it stores it in a bank account, and whenever it earns interest gives it to the shareholders as a dividend. Also, it doesn't have any expenses at all, and doesn't pay taxes, and is otherwise magic so that it doesn't have to worry about distractions from its mathematical perfection. There are 10,000 shares of MoneyCorp, each worth exactly $1. However, they may trade for more or less than $1 on the stock market, because it's a free market and people trading stock on the stock market can trade at whatever price two people agree on. Scenario 1. MoneyCorp wants to expand. They sell 90,000 shares for $1 each. The money goes in the same bank account at the same interest rate. Do the original shareholders see a change? No. 100,000 shares, $100,000, still $1/share. No problem. This is the ideal situation. Scenario 2: MoneyCorp sells 90,000 shares for less than the current price, $0.50 each. Do the original shareholders lose out? YES. It now has something like $55,000 and 100,000 shares. Each share is now worth $0.55. The company has given away valuable equity to new shareholders. That's bad. Why didn't they get more money from those guys? Scenario 3: MoneyCorp sells 90,000 shares for more than the current price, $2 each, because there's a lot of hype about its business. MoneyCorp now owns $190,000 in 100,000 shares and each share is worth $1.90. Existing shareholders win big! This is why a company would like to make its share offering at the highest price possible (think, Facebook IPO). Of course, the new shareholders may be disappointed. MoneyCorp is actually a lot like a real business! Actually, if you want to get down to it, MoneyCorp works very much like a money-market fund. The main difference between MoneyCorp and a random company on the stock market is that we know exactly how much money MoneyCorp is worth. You don't know that with a real business: sales may grow, sales may drop, input prices may rise and fall, and there's room for disagreement - that's why stock markets are as unpredictable as they are, so there's room for doubt when a company sells their stock at a price existing shareholders think is too cheap (or buys it at a price that is too expensive). Most companies raising capital will end up doing something close to scenario 1, the fair-prices-for-everyone scenario. Legally, if you own part of a company and they do something a Scenario-2 on you... you may be out of luck. Consider also: the other owners are probably hurt as much as you are. Only the new shareholders win. And unless the management approving the deal is somehow giving themselves a sweetheart deal, it'll be hard to demonstrate any malfeasance. As an individual, you probably won't file a lawsuit either, unless you own a very large stake in the company. Lawsuits are expensive. A big institutional investor or activist investor of some sort may file a suit if millions of dollars are at stake, but it'll be ugly at best. If there's nothing evil going on with the management, this is just one way that a company loses money from bad management. It's probably not the most important one to worry about. The reason a company creates more stock is to generate more capital so that this can be utilized and more returns can be generated. It is commonly done as a follow on public offer. Typically the funds are used to retire high cost debts and fund future expansion. What stops the company from doing it?   Are Small investors cheated?   It's like you have joined a car pool with 4 people and you are beliving that you own 1/4th of the total seats ... so when most of them decide that we would be better of using Minivan with 4 more persons, you cannot complain that you now only own 1/8 of the total seats. Even before you were having just one seat, and even after you just have one seat ... overall it maybe better as the ride would be good ... :) Let me answer with an extreme example - I own the one single share of a company, and it's worth $1M. I issue 9 more shares, and find 9 people willing to pay $1M for each share. I know find my ownership dropped by 90%, and I am now a 10% owner of a business that was valued at $1M but with an additional $9M in the bank for expansion. (Total value now $10M) Obviously, this is a simplistic view, but no simpler than the suggestion that your company would dilute its shares 90% in one transaction.
Need help with a finance problem I'm currently facing in my business.  My company might be going through an acquisition and I need to understand how the dilution works out for shareholders.  They currently have large shareholder loans (debt), and will be converting to equity pre-transaction.  For this case, if the original company value = $1 MM and the SHL value = $1 MM, I'm assuming that'd dilute equity by 50% for all shareholders if converted to equity at original company value.  Correct?  However, what if the $1 MM in shareholder loans were converted at the market value of the company, say $4 MM?    I might be confusing myself, but just want to confirm.. thanks! Any time a large order it placed for Buy, the sell side starts increasing as the demand of Buy has gone up. [Vice Versa is also true]. Once this orders gets fulfilled, the demand drops and hence the Sell price should also lower. Depending on how much was the demand / supply without your order, the price fluctuation would vary. For examply if before your order, for this particular share the normal volume is around 100's of shares then you order would spike things up quite a bit. However if for other share the normal volume is around 100000's then your order would not have much impact. Nominal. What you say is true, but I'm guessing it would be too complicated to modelate. Plus, a shareholder of a very large company would not necessarily experience said loss if he/she sells the stock in small chunks at a time. When you buy shares, you are literally buying a share of the company.  You become a part-owner of it. Companies are not required to pay dividends in any given year.  It's up to them to decide each year how much to pay out. The value of the shares goes up and down depending on how much the markets consider the company is worth.  If the company is successful, the price of the shares goes up.  If it's unsuccessful, the price goes down.  You have no control over that.  If the company fails completely and goes bankrupt, then the shares are worthless. Dilution is where the company decides to sell more shares.  If they are being sold at market value, then you haven't really lost anything.  But if they are sold below cost (perhaps as an incentive to certain staff), then the value of the company per share is now less.  So your shares may be worth a bit less than they were.  You would get to vote at the AGM on such schemes.  But unless you own a significant proportion of the shares in the company, your vote will probably make no difference. In practice, you can't protect yourself.  Buying shares is a gamble.  All you can do is decide what to gamble on. I think the simple answer to your question is: Yes, when you sell, that drives down the price. But it's not like you sell, and THEN the price goes down. The price goes down when you sell. You get the lower price.  Others have discussed the mechanics of this, but I think the relevant point for your question is that when you offer shares for sale, buyers now have more choices of where to buy from. If without you, there were 10 people willing to sell for $100 and 10 people willing to buy for $100, then there will be 10 sales at $100. But if you now offer to sell, there are 11 people selling for $100 and 10 people buying for $100. The buyers have a choice, and for a seller to get them to pick him, he has to drop his price a little. In real life, the market is stable when one of those sellers drops his price enough that an 11th buyer decides that he now wants to buy at the lower price, or until one of the other 10 buyers decides that the price has gone too low and he's no longer interested in selling. If the next day you bought the stock back, you are now returning the market to where it was before you sold. Assuming that everything else in the market was unchanged, you would have to pay the same price to buy the stock back that you got when you sold it. Your net profit would be zero. Actually you'd have a loss because you'd have to pay the broker's commission on both transactions. Of course in real life the chances that everything else in the market is unchanged are very small. So if you're a typical small-fry kind of person like me, someone who might be buying and selling a few hundred or a few thousand dollars worth of a company that is worth hundreds of millions, other factors in the market will totally swamp the effect of your little transaction. So when you went to buy back the next day, you might find that the price had gone down, you can buy your shares back for less than you sold them, and pocket the difference. Or the price might have gone up and you take a loss. "Some companies issue multiple classes of shares.  Each share may have different ratios applied to ownership rights and voting rights.  Some shares classes are not traded on any exchange at all.  Some share classes have limited or no voting rights.   Voting rights ratios are not used when calculating market cap but the market typically puts a premium on shares with voting rights. Total market cap must include ALL classes of shares, listed or not, weighted according to thee ratios involved in the company's ownership structure.  Some are 1:1, but in the case of Berkshire Hathaway, Class B shares are set at an ownership level of 1/1500 of the Class A shares. In terms of Alphabet Inc, the following classes of shares exist as at 4 Dec 2015: When determining market cap, you should also be mindful of other classes of securities issued by the company, such as convertible debt instruments and stock options.  This is usually referred to as ""Fully Diluted"" assuming all such instruments are converted." Of course, this calculation does not take into consideration the fact that once the rights are issues, the price of the shares will drop. Usually this drop corresponds to the discount. Therefore, if a rights issue is done correctly share price before issuance-discount=share price after issuance. In this result, noone's wealth changes because shareholders can then sell their stock and get back anything they had to put in. Alot of these answers have focused on the dilution aspect, but from a purely legal aspect, there are usually corporate bylaws that spell out what kind of vote and percentage of votes is needed to take this type of action.  If all other holders of stock voted to do this, so 90% for, and you didn't, so 10% against, it's still legal if that vote meets the threshold for taking the action. As an example of this, I known of a startup where employees got $0/share for their vested shares when the company was sold because the voting stock holders agreed to it.  Effectively the purchase amount was just enough to cover debts and preferred stock. "Note that these used to be a single ""common"" share that has ""split"" (actually a ""special dividend"" but effectively a split). If you owned one share of Google before the split, you had one share giving you X worth of equity in the company and 1 vote. After the split you have two shares giving you the same X worth of equity and 1 vote. In other words, zero change. Buy or sell either depending on how much you value the vote and how much you think others will pay (or not) for that vote in the future.  As Google issues new shares, it'll likely issue more of the new non-voting shares meaning dilution of equity but not dilution of voting power. For most of us, our few votes count for nothing so evaluate this as you will.  Google's founders believe they can do a better job running the company long-term when there are fewer pressures from outside holders who may have only short-term interests in mind. If you disagree, or if you are only interested in the short-term, you probably shouldn't be an owner of Google. As always, evaluate the facts for yourself, your situation, and your beliefs." You can't tell for sure.  If there was such a technique then everyone would use it and the price would instantly change to reflect the future price value. However, trade volume does say something.  If you have a lemonade stand and offer a large glass of ice cold lemonade for 1c on a hot summer day I'm pretty sure you'll have high trading volume.  If you offer it for $5000 the trading volume is going to be around zero. Since the supply of lemonade is presumably limited at some point dropping the price further isn't going to increase the number of transactions.   Trade volumes reflect to some degree the difference of valuations between buyers and sellers and the supply and demand.  It's another piece of information that you can try looking at and interpreting.  If you can be more successful at this than the majority of others on the market (not very likely) you may get a small edge.  I'm willing to bet that high frequency trading algorithms factor volume into their trading decisions among multiple other factors. You have just answered your question in the last sentence of your question:  More volume just means more people are interested in the stock...i.e supply and demand are matched well. If the stock is illiquid there is more chance of the spread and slippage being larger. Even if the spread is small to start with, once a trade has been transacted, if no new buyers and sellers enter the market near the last transacted price, then you could get a large spread occurring between the bid and ask prices. Here is an example, MDG has a 50 day moving average volume of only 1200 share traded per day (obviously it does not trade every day).  As you can see there is already an 86% spread from the bid price. If a new bid price is entered to match and take out the offer price at $0.039, then this spread would instantly increase to 614% from the bid price. The bonus share also improves the liquidity however there is some difference in treatment. Lets say a company has 100 shares, of $10 ea. The total capital of the compnay is 100*10 = 1000. Assuming the company is doing well, its share is now available in the market for $100 ea. Now lets say the company has made a profit of $1000 and this also gets factored into the price of $100. Lets say the company decides to keep this $1000 kept as Cash Reserve and is not distributed as dividends.   In a share split say (1:1), the book value of each share is now reduced to $5, the number of shares increase to 200. The share capital stays at 200*5 = 1000. The market value of shares come down to $50 ea.   In a Bonus share issue say (1:1), the funds $1000 are moved from Cash Reserve and transferred to share capital. The book value of each share will remain same as $10, the number of shares increase to 200. The share capital increases to 200*10 = 2000. The market value of shares come down to $50 ea.   So essentially from a liquidity point of view both give the same benefit. As to why some companies issue bonus and not a split, this is because of multiple reasons. A split beyond a point cannot be done, ie $10 can be split to $1 ea but it doesn't look good to make it $0.50. The other reason is there is adequate cash reserve and you want to convert this into share holders capital. Having a larger share holders capital improves some of the health ratios for the compnay. At times bouns is used to play upon that one is getting something free. You can calculate the fully diluted shares by comparing EPS vs diluted (adjusted) EPS as reported in 10K. I don't believe they report the number directly, but it is a trivial math exercise to reach it. The do report outstanding common stock (basis for EPS). First, I want to point out that your question contains an assumption. Does anyone make significant money trading low volume stocks?  I'm not sure this is the case - I've never heard of a hedge fund trading in the pink sheets, for example. Second, if your assumption is valid, here are a few ideas how it might work: Accumulate slowly, exit slowly.  This won't work for short-term swings, but if you feel like a low-volume stock will be a longer-term winner, you can accumulate a sizable portion in small enough chunks not to swing the price (and then slowly unwind your position when the price has increased sufficiently). Create additional buyers/sellers.  Your frustration may be one of the reasons low-volume stock is so full of scammers pumping and dumping (read any investing message board to see examples of this).  If you can scare holders of the stock into selling, you can buy significant portions without driving the stock price up.  Similarly, if you can convince people to buy the stock, you can unload without destroying the price.  This is (of course) morally and legally dubious, so I would not recommend this practice. Volume and prices are affected together by how folks feel about the stock; there is no direct relationship between them. There are no simple analysis techniques that work.  Some would argue strongly that there are few complex analysis techniques that work either, and that for anyone but full-time professionals. And there isn't clear evidence that the full-time professionals do sufficiently better than index funds to justify their fees. For most folks, the best bet is to diversify, using low-overhead index funds, and simply ride with the market rather than trying to beat it.