When a company sells stocks, it is important to know if this was stock they already owned (called Treasury stock) or if they are issuing (creating) new shares. If they are simply selling treasury stock, there should be little to no effect on the stock. If they are issuing new shares, this typically has a negative impact on a stock since this creates dilution of the current shareholders. Imagine you own 10,000 shares of a company that has 100,000 shares total outstanding. You own 10% of the company. However, lets say the company issues 100,000 more shares to raise capital, the value of your investment would go down since you only own 5% now.

The only time investors don’t mind a new stock issue is when they are issuing stock to buy a new company. In our prior example, if the company used the money to buy another business the same size, you would now own 5% of a company that is twice as big. As you can see, your investment didn’t really change in value.

But, one last thing about trading news events. I said this many times in the Trading Room, “understanding the news isn’t important. The reaction to the news is what we need to understand.”

Hopefully this helps,
Robb