Apparently if more people buy stock it diminishes the proportional market value of them. Why is this? If I found a box with ten doughnuts inside, and took two, wouldn’t I still own 20% of the box even if other people took doughnuts as well? I think I’m missing something.
No, only a “New Issue” can increase the number of shares. When an entity issues common stock it puts an amount out on the public markets, this is called the float, and keeps an amount off the market so that the entity can issue more stock for various reasons the biggest being that it wants to pay people in the form of options/warrants on that stored stock to avoid paying taxes. (The whole thing is really just a product of regulation.) Anyway, the value of the entity is the price of the market shares x (float + internal). Look at the Facebook earners they are realizing that the 10% float does not save their shares held off the market.
Now in a new issue the entity is putting new stock on the market that will necessarily reduce the price of the shares outstanding.
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In other words, I don’t understand the fancy economist terms. Speak English please.
They’re cutting the donuts in half and then selling them.
@Fool, but how does that effect your doughnuts? I just want a straightforward response that I can understand.
Only when the company issues new shares, does the existing owners get diluted(http://en.wikipedia.org/wiki/Stock_dilution).