One of the biggest concerns for shareholders is the value of their shares. Shares of stock, after all, are only worth as much as the company who offers them. Share price (in a very broad sense) is determined by the market value per share divided by the earnings per share of the company. Price Earnings Ratio.
Another important factor to consider is the number of shares outstanding in any one particular stock. If there are 4 billion shares outstanding; the value of the stock is going to be a lot more weighed on than if there are 300,000. The availability or lack-thereof strengthens or weakens the strength of the stock's value. When the value of a stock is dragged down by the availability of too many shares, this is called dilution.
Dilution is a real problem for penny stocks. Penny stocks are usually struggling companies who are trying a new business or up and coming stocks that have yet to prove themselves in their industry.
Just because a penny stock has a new product or service doesn't mean that it's destined to fail. The internet, new medical processes, new business paradigms, and smarter ways of getting old processes done are often what penny stocks are all about. If you have done your due diligence and you believe in the future of what your penny stock is all about, then you should invest in this company. However one of the biggest causes for concern is going to be if and when the company begins introducing too many shares to market, causing price deprecation from dilution.
Penny stock investors need to be wary of apocalyptic scenarios from less prudent temperaments. Dilution is often misdiagnosed by some in the financial services media and even in the chat rooms and financial discussion boards. If a company has issued new shares to market and these shares are gobbled up by smart investors who see the same promise in this company that you do, the impact on long term share value will ultimately be small.
What many companies do to raise money is issue new shares. Once the company has deals which are locked in place and the money is in hand, they will execute a buyback or a reverse split to reduce the number of outstanding shares by 10, 100, 1000, or even more.
Introduction of new shares to market can cause initial dilution. But if the product or service your company is bringing to market is worth enough to consumers, then cooler heads will rule the day and your stock will eventually recover and rise.
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