Just The Markets

Quiz · Stock Trading · Intermediate

Where Did the New Shares Come From? A Stock Dilution Quiz

Every stock dilution quiz question gives you a filing excerpt or a company update from a hypothetical business. Name where the extra shares came from, if they came at all.

AI-assisted, reviewed by the Just The Markets human editor: Beth Rue → Marked as you go Published

What it tests

Whether you can trace a change in a company's share count to its source, from offerings and warrants to stock pay and buybacks.

Weighted average diluted shares: 112,000,000, against 100,000,000 a year earlier. That one line at the bottom of the income statement says your slice of the company shrank by about a tenth. The line gives the size, and the notes give the cause.

Why the source matters

New shares cost you money in two ways. Every share has a thinner claim on earnings, and a thinner claim on the sale price if the company is ever bought. The source tells you whether it will happen again. A one-off offering is a single event with a known size, while an at-the-market program, a stack of warrants or a heavy stock pay plan can keep adding shares every quarter for years, which changes what you should assume in any per-share estimate you build.

Each question gives a short filing excerpt or company update and asks you to name the source. Read the numbers first.

A worked example

Here is what a mid-sized issue does to a small holder.

You own a fifth less of the company. The EPS falls by the same fifth unless the new cash earns something. Run your own numbers through the share dilution calculator.

What the money buys decides how much the dilution hurts. Cash from an issue that pays off expensive debt or builds a plant earning a good return can win back the lost fifth of EPS over a few years, as the interest saved or the new profit flows through to every share that remains. Cash that covers operating losses wins back nothing. The next raise follows.

Using a wrong answer

If you miss one, look up the term it turns on. A shelf registration is the filing that lets a company sell stock later without a fresh registration each time. Convertible notes read like debt until they convert. Then practice on a real ticker: checking a company’s share count history walks you through finding the count in each quarterly filing, lining the figures up across several years and matching every jump to the event in the notes that caused it. With only a minute to spare, start with the diluted count.

Pick an answer to mark it

The questions

  1. The situationFrom a hypothetical biotech's press release: the company priced an offering of 10,000,000 newly issued shares at $20.00 each, for gross proceeds of $200,000,000. Shares outstanding rise from 80,000,000 to 90,000,000 when it closes.

    1What is the source of the new shares?
    Show the answer

    B: A follow-on offering of new shares. This is a primary follow-on offering: the company sold new stock and kept the cash. The 10,000,000 new shares take the count up 12.5%, so a holder who owned 1% before now owns about 0.89%, which is 800,000 divided by 90,000,000.

  2. The situationFrom a hypothetical 10-Q: during the quarter, the company sold 3,000,000 shares of common stock under its at-the-market equity program, for net proceeds of $45,000,000. No underwritten offering took place.

    2Where did these shares come from?
    Show the answer

    C: An at-the-market program. Under an at-the-market program, the company drips new stock into ordinary trading a little at a time, usually off a shelf registration. Net proceeds of $45,000,000 on 3,000,000 shares is $15.00 a share. The shares arrive quietly, so the quarterly filing is often the first place you see them.

  3. The situationFrom a hypothetical company update: holders exercised warrants covering 4,000,000 shares at an exercise price of $8.00. The company received $32,000,000 and issued the shares. The stock trades at $14.00.

    3What created the new shares?
    Show the answer

    A: Warrant exercises. Warrants are the idea here. Each one lets the holder buy a share from the company at a set price. With the stock at $14.00 and the exercise price at $8.00, holders pay 4,000,000 times $8.00, which is $32,000,000, for stock worth $56,000,000, and existing holders absorb the gap.

  4. The situationFrom a hypothetical 10-K footnote: $100,000,000 of convertible senior notes were converted during the year at a rate of 40 shares per $1,000 of principal. The notes are no longer outstanding.

    4How many shares did the conversion add, and why?
    Show the answer

    B: 4,000,000 shares, from a note conversion. Convertible notes swap debt for stock. $100,000,000 of principal is 100,000 notes of $1,000 each, and 100,000 times 40 shares is 4,000,000 shares. The debt goes away and the share count takes its place.

  5. The situationA hypothetical software company did no offerings and has no convertible notes or warrants. Its diluted share count still rose from 200,000,000 to 203,000,000 over the year. The cash flow statement shows a large add-back for stock-based compensation, and the equity footnote lists 3,000,000 shares issued as restricted stock units vested.

    5What is the source of the extra shares?
    Show the answer

    D: Stock compensation paid to employees. Stock-based pay is dilution that repeats every year. The 3,000,000 vested units account for the whole rise, which is 1.5% of the starting count. A 1.5% annual rise compounds, so check whether buybacks are offsetting it.

  6. The situationFrom a hypothetical 10-Q: the company repurchased 8,000,000 shares during the year and issued 2,000,000 shares under employee plans. Diluted shares went from 150,000,000 to 144,000,000.

    6What happened to the share count?
    Show the answer

    C: It fell, because buybacks outran employee issuance. Net share count is the idea. 150,000,000 minus 8,000,000 plus 2,000,000 is 144,000,000, a 4% fall. Employee grants still added 2,000,000 shares, so the buyback spent part of its money soaking those up.

  7. The situationA hypothetical company announces that its founder and an early venture fund will sell 12,000,000 existing shares in a registered secondary offering. The company will receive none of the proceeds. Shares outstanding stay at 60,000,000.

    7Where do the new shares come from?
    Show the answer

    D: Nowhere: no new shares are created. A secondary sale of existing shares moves stock from one owner to another. The count stays at 60,000,000 and your percentage stays the same. Heavy insider selling can still pressure the price, so it is worth reading for what it says about the sellers.

People also ask

How can you tell if a company is diluting shareholders?

Compare the diluted share count on the income statement across several quarters. A rising count means new shares, and the filing notes say where they came from: an offering, an at-the-market program, warrant or option exercises, converted notes or shares issued to employees. A company can issue shares and still shrink its count if buybacks are larger.

Does a secondary offering always dilute existing shareholders?

Only when the company issues new shares. In a secondary sale of existing shares, insiders or early investors sell stock they already hold, the company gets no cash and the share count stays the same. Your percentage of the company is unchanged, though the extra supply can still weigh on the price for a while.

More quizzes and games