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Very few traders and investors think about stock dilution when they buy stocks. Knowing if a company has a history with stock dilution is important because this is how management transfers wealth from existing shareholders to themselves or to a small group of private investors through sweetheart deals.
Academically, stock dilution can be beneficial to its shareholders, but in reality that is rarely the case. Don't fall into the trap of being a liquidity provider for these stocks. Managment can print out more additional stock certificates than you have cash in your brokerage account.
If you are thinking about buying the pullbacks, picking the bottom, or a stock is over sold, forget about it. Putting your capital to work in these stocks is dead money.
Stock Dilution - The transfer of wealth from existing shareholders to Management or to a small group of private investors.
Avoid the pitfall investing in stocks with high stock dilution. Here is a selected list of stocks with a history of high stock dilution.
Trading Insight:
Evaluating the integrity of management is important. One yardstick that I use is stock dilution. Management must be friendly and respectful toward existing stockholders. They don't have a history of stock dilution. If I am going to take a position in a stock as a value play, I would prefer to have the number of outstanding shares shrink instead of increasing. Never take a position in a stock for a value play if management have no qualms about turning on the printing presses and churning out more stocks.
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