“Staples, the company (SPLS), has announced that they are going to issue 50% more stock. Dilute not split. I voted my proxy against this, but it looks like it is going to pass anyway. Why would anyone vote for this? Are the big institutions (Fidelity, et al) getting information that I am not? My 0.18 millionths of this company is soon to be only 0.12 millionths. This might not seem like much, but hey, it’s the principle!” — Wayne A.

There is a world of difference between authorizing shares and issuing them. I suspect they are authorizing. But if they ever do issue additional shares (of those authorized to be issued), they — and you — will presumably get something in return . . . such as another company.

Right now Staples has 464 million shares outstanding. I am too lazy to look this up, but I’m guessing maybe 500 million are authorized. So in case they want to — quick! acquire Rubberbands.com for 50 million Staples shares — well, you can see why they’d want authorization to go beyond the 500 million. (And no, don’t rush to day-trade Rubberbands.com — I made it up.)

The “float” on SPLS currently is around 390 million shares. That’s a different number, referring to the shares that are unrestricted for trading and out in public hands.

(With a new company, there might be 10 million shares issued out of 100 million authorized, but 8 million of them — 80% of the company — might still be in the pockets of the founder and her husband. Maybe the company went public by selling just 2 million of those 10 million shares. So in this example, the “float” would be just 2 million shares, making the stock very scarce if there were a lot of interest in it. It can be tough to buy large blocks of stock with a small float — in trying, you drive the price up.)

Meanwhile, the short interest in SPLS is under 5 million shares, with a short ratio of about 1.7. This means that, relative to the 464 million shares issued and outstanding, few have been borrowed by speculators and sold short. Relative to the float, it’s still trivial. But the “short ratio” many short-sellers look at to see how hard it will be to cover their shorts, should they feel the need, is the ratio of the “short interest” — the nearly 5 million shares that have been borrowed and sold short — to the stock’s average daily trading volume, which for SPLS is about 3 million shares.

In other words, in this case, if no one else were buying (which would not be the case, but just by way of example), and if sellers were selling the same 3 million shares a day they have been selling on average, it would take the shorts just 1.7 days to “cover” their shorts (i.e., to buy back the shares they borrowed and sold short, and return them to their rightful owners).

“Authorized” is one of those formalities only a little less archaic (if you ask me) than a stock’s “par value,” which by now as best I can tell, means absolutely nothing. Yes, the shareholders must approve any increase in the authorized number of shares. But authorizing more shares has no impact on the size of the pie or who owns what proportion of it. What matters, and can dilute or enhance your ownership stake, is the issuance of new shares. There the crucial question is: what is the company getting in return for issuing them? Is it a good deal? Could Rubberband.com really be worth 50 million shares?

Sometimes yes, sometimes no.

 

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