Let me explain in a simple manner using Pizza analogy Imagine a company’s ownership is a whole pizza cut into 4 large slices. If you own 1 slice, you own 25% of the pizza. If the company decides to create new share issues (e.g., re-slicing that same pizza into 8 smaller slices) to bring in new invesRead more
Let me explain in a simple manner using Pizza analogy
Imagine a company’s ownership is a whole pizza cut into 4 large slices. If you own 1 slice, you own 25% of the pizza. If the company decides to create new share issues (e.g., re-slicing that same pizza into 8 smaller slices) to bring in new investors, but you don’t buy any new slices, you still only own 1 slice.
Now, your 1 slice represents only 12.5% of the whole pizza instead of 25%. This reduction in your percentage of ownership is called ownership dilution.
2. How New Share Issues WorkWhen a business needs capital to fund growth, pay off debt, or make investments, it can issue brand-new stock (shares) and sell them to investors.
Before the issue: Total shares existing = #1,000,000. New shares issued: #250,000.
After the issue: Total shares existing = #1,250,000.
3. Impact of Ownership DilutionWhen new shares are created, existing shareholders experience several changes if they do not purchase additional shares: Reduced Voting Power: Your percentage share of the vote in major company decisions goes down.
Earnings Per Share (EPS) Dilution: Company profits are spread across a larger number of shares, which can temporarily reduce earnings per share. Dividend Share: Any potential per-share dividend payout gets split among more total shares.
Is Dilution Always Bad?
Not necessarily. If the money raised from issuing new shares allows the company to grow significantly, the total company “pie” grows much larger. Owning 10% of a #100 million company (#10 million) is better than owning 20% of a #10 million company (#2 million).
Imagine you have a small farm where you grow tomatoes, and you want to expand your farm to grow more tomatoes and make more money. Now, let's connect this to the difference between a share price and business performance in a way even Mama Ngozi from the village can understand.So, in our story, yourRead more
Imagine you have a small farm where you grow tomatoes, and you want to expand your farm to grow more tomatoes and make more money. Now, let’s connect this to the difference between a share price and business performance in a way even Mama Ngozi from the village can understand.
So, in our story, your farm’s business performance is how well your tomatoes are growing, how many you are selling, and how much profit you are making. It’s like the overall success of your farm – if your tomatoes are healthy and selling well, your business performance is good.
On the other hand, the share price is like the value that people see in your farm. If your tomatoes are growing very well, and everyone can see that your farm is successful, more people will want to invest in your farm by buying shares. This increased demand for your farm will make the share price go up.
But here’s the twist: sometimes, the share price may go up or down for reasons that have nothing to do with how well your tomatoes are actually growing. For example, if there’s news that tomato farms might be less profitable next year, people may sell their shares in your farm, causing the share price to drop. This doesn’t mean your tomatoes suddenly became less delicious – it’s just how people perceive the future of tomato farming.
So, in summary, business performance is like the real-life success of your farm, while the share price reflects how investors perceive the value of your farm based on various factors, not just how well your tomatoes are doing. Remember, it’s essential to focus on growing those tomatoes and running your farm well, as that will have a long-term impact on your success, regardless of short-term fluctuations in share prices.
Now, do you see the difference between share price and business performance, just like understanding the health of your tomato farm compared to how others see its value?
What Is Share Dilution and How Do New Share Issues Affect Existing Shareholders?
Let me explain in a simple manner using Pizza analogy Imagine a company’s ownership is a whole pizza cut into 4 large slices. If you own 1 slice, you own 25% of the pizza. If the company decides to create new share issues (e.g., re-slicing that same pizza into 8 smaller slices) to bring in new invesRead more
Let me explain in a simple manner using Pizza analogy
Imagine a company’s ownership is a whole pizza cut into 4 large slices. If you own 1 slice, you own 25% of the pizza. If the company decides to create new share issues (e.g., re-slicing that same pizza into 8 smaller slices) to bring in new investors, but you don’t buy any new slices, you still only own 1 slice.
Now, your 1 slice represents only 12.5% of the whole pizza instead of 25%. This reduction in your percentage of ownership is called ownership dilution.
2. How New Share Issues WorkWhen a business needs capital to fund growth, pay off debt, or make investments, it can issue brand-new stock (shares) and sell them to investors.
Before the issue: Total shares existing = #1,000,000. New shares issued: #250,000.
After the issue: Total shares existing = #1,250,000.
3. Impact of Ownership DilutionWhen new shares are created, existing shareholders experience several changes if they do not purchase additional shares: Reduced Voting Power: Your percentage share of the vote in major company decisions goes down.
Earnings Per Share (EPS) Dilution: Company profits are spread across a larger number of shares, which can temporarily reduce earnings per share. Dividend Share: Any potential per-share dividend payout gets split among more total shares.
Is Dilution Always Bad?
Not necessarily. If the money raised from issuing new shares allows the company to grow significantly, the total company “pie” grows much larger. Owning 10% of a #100 million company (#10 million) is better than owning 20% of a #10 million company (#2 million).
See lessWhat Is the Difference Between Share Price and Business Performance on NGX?
Imagine you have a small farm where you grow tomatoes, and you want to expand your farm to grow more tomatoes and make more money. Now, let's connect this to the difference between a share price and business performance in a way even Mama Ngozi from the village can understand.So, in our story, yourRead more
Imagine you have a small farm where you grow tomatoes, and you want to expand your farm to grow more tomatoes and make more money. Now, let’s connect this to the difference between a share price and business performance in a way even Mama Ngozi from the village can understand.
So, in our story, your farm’s business performance is how well your tomatoes are growing, how many you are selling, and how much profit you are making. It’s like the overall success of your farm – if your tomatoes are healthy and selling well, your business performance is good.
On the other hand, the share price is like the value that people see in your farm. If your tomatoes are growing very well, and everyone can see that your farm is successful, more people will want to invest in your farm by buying shares. This increased demand for your farm will make the share price go up.
But here’s the twist: sometimes, the share price may go up or down for reasons that have nothing to do with how well your tomatoes are actually growing. For example, if there’s news that tomato farms might be less profitable next year, people may sell their shares in your farm, causing the share price to drop. This doesn’t mean your tomatoes suddenly became less delicious – it’s just how people perceive the future of tomato farming.
So, in summary, business performance is like the real-life success of your farm, while the share price reflects how investors perceive the value of your farm based on various factors, not just how well your tomatoes are doing. Remember, it’s essential to focus on growing those tomatoes and running your farm well, as that will have a long-term impact on your success, regardless of short-term fluctuations in share prices.
Now, do you see the difference between share price and business performance, just like understanding the health of your tomato farm compared to how others see its value?
See less