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| Aladdin |
 Posted: Fri Feb 18, 2005 8:57 am Post subject: Stock Dividend Question |
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Investing Associate
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My husband's company has approved and decided to issue a stock dividend of Special Common Shares and increase the number of authorized Special Common Shares.
The price is going up since the announcement. Will that continue? How does this typically affect the price of the stock? |
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| Mayur |
| Posted: Fri Feb 18, 2005 12:11 pm Post subject: |
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Investing Associate
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I would say it would go up but in the long run it will start to either go down or stay constant. I would say short-term only.  |
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| Aladdin |
| Posted: Sun Feb 20, 2005 10:47 am Post subject: |
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Investing Associate
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| Thank you. That is what I was thinking. He has stock options and we are trying to decide what to do. |
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| CapM |
| Posted: Wed Feb 23, 2005 3:53 pm Post subject: Response |
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Investing Associate
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It appears that your husband owns Stock Options - i.e. the RIGHT to buy shares at a predetermined price. As you probably know, this is very different than actually owning the shares.
As such, the impacts of a stock dividend on those who own shares, as opposed to those who own OPTIONS, is VERY different.
The absolute first thing your husband must do is read his option agreement/and or talk to HR about his options. He must find out and understand the "Antidilution Provisions" of his agreement. If the agreement protects against dilution, he will be just fine in the event of a stock dividend. However, if there are no "Antidilution Provisions", the value of his options could diminish with each stock dividend.
I'll try to explain dilution (stop here if you don't care about the basic mechanics) -
Let's say you own 1,000 shares of XYZ company, and the total outstanding shares of XYZ is 100,000 shares. You effectively own 1% of the company, XYZ.
Now, let's say XYZ issues an additional 100,000 shares of stock, but you don't buy any more of the stock (i.e. you retain your 1,000 shares).
Now what percentage of the company do you own? You now own one half, of 1% of the comany. A 1% ownership of the company is worth a lot more (double) than the adjusted ownership percentage (0.5%). This is dilution.
Now, in your circumstance, the company issues a stock dividend, so all current shareholders get a prorated portion of the overall dividend. In essence, they maintain their % ownership of the company, since they are receiving their portion of the newly issued stock.
However, those that own OPTIONS on the stock, don't actually own the stock - they own the RIGHT to buy the stock. Therefore, they don't receive any stock, and now are only able to buy a smaller % of the company - thereby reducing the value of their options.
The price of the stock is also affected during this time, but another few posts and probably not worth it at this time.
Just have your husband check carefully read the Option agreement. It is extremely important. I hope this helps (and wasn't too long). |
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