An increase in the total of capital stock showing on a company's balance sheet is bad for investors, because it represents the issuance of additional stock shares, which dilute the ownership value of investors' existing shares. However, the increase in capital stock may, in the long run, benefit investors in the form of increased return on equity through capital gains, an increase in dividend payouts or both.

Capital stock is the total amount of stock, both common and preferred, that a company has the authorization to issue. This amount is usually initially stated in the company charter. However, the company commonly has the right to increase the amount of stock authorized for issuance through approval by its board of directors. Along with the right to buy back existing shares from stockholders, a company also has the right to issue more shares for sale.

Increases in the total capital stock negatively impact existing shareholders since they result in dilution. An increase in the total number of stock shares means that each existing share represents a smaller percentage of ownership. As the company's earnings are divided by the new, larger number of shares to determine the company's earnings per share (EPS), the company's EPS figure will drop.

However, increases in capital stock can ultimately be beneficial for investors. The increase in capital for the company raised by selling additional shares of stock can finance additional company growth. If the company invests the additional capital successfully, then the ultimate gains in stock price and dividend payouts realized by investors may be more than sufficient to compensate for the dilution of their shares.

It is a good sign if a company can issue a significant amount of additional stock without seeing a significant drop in share price .

Investors and analysts are wary if a company continually initiates additional stock share offerings, as this often indicates that the company is having difficulty maintaining financial solvency with current revenues and is in constant need of additional financing.

  1. Why is the value of capital stock important to public shareholders?

    Understand what capital stock is and how it's issued and authorized. Learn why the value of capital stock important to public ... Read Answer >>
  2. What's the difference between a capital stock and a treasury stock?

    Learn about treasury capital stock, how to calculate a company's capital and treasury stock, and the differences between ... Read Answer >>
  3. Why is a company's diluted EPS always lower than its simple EPS?

    Learn about diluted and basic earnings per share and why a company's diluted earnings per share is usually lower than its ... Read Answer >>
  4. What is authorized stock?

    Authorized stock represents the maximum number of common shares that can be issued legally by the company as stated in the ... Read Answer >>
  5. What is dilutive stock?

    Dilutive stock is any security that dilutes the ownership percentage of current shareholders - that is, any security that ... Read Answer >>
  6. What Does the Diluted Share Price Reveal?

    Learn how diluted share price affects earnings and the company's overall financial performance. Read Answer >>
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