The company creates and sells new shares to raise cash. Existing shareholders end up owning a smaller fraction of the same business, and the new shares are usually sold at a discount — both of which weigh on the price.
Instead of borrowing money, the company issues new shares and sells them. Cash comes in; the number of shares goes up.
If a company with 100 million shares issues 20 million more, each existing share now represents a smaller slice of the same business. That is dilution.
New shares typically have to be priced below the current market price to attract buyers, which pulls the market price toward that discount.
There is a signalling effect too. Management chooses when to sell shares, and choosing to sell can be read as a view that the shares are not cheap.
For a company that is burning cash and has a limited runway, part of the share price reflects the risk of running out of money. Raising cash removes that risk.
The dilution is real, but 'this company will still be here' can outweigh 'you own a slightly smaller share of it'. This is why an offering from a company with no profits can be received very differently from one by a profitable company.
A follow-on or secondary offering is a straightforward batch of new shares. A registered direct sells to a small number of institutions. An at-the-market programme releases shares gradually into the open market.
Convertible notes are debt that may become shares later — no dilution today, potential dilution if the notes convert.
One question, no account: what did you come here for, and did you find it? A person reads these, and they shape what gets written next.
From StockMotive — the honest why behind every market move. Educational information only, not investment advice.