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Apologies if this is a duplicate, but someone (quite possibly me) is confused about whether stock shares can be arbitrary manufactured at any time and in any quantity, or whether they in fact represent partial ownership of the company and can be reorganized (eg, repurchased by the company, or company-owned shares sold) but not multiplied after the issue.

This gets to the basic question of what a share "is". I thought I understood that, but possibly not, and if I'm wrong I'd like to be corrected.

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    It depends on what you mean by "arbitrary manufactured at any time and in any quantity, or whether they in fact represent partial ownership of the company." Change in the number of shares can occur from forward and reverse splits and secondary offerings. Shorting creates additional synthetic long shares and AFAIC, that's somewhat artificial. Feb 5, 2023 at 17:49
  • That was my understanding. But there seems to be confusion on this point (see the question about dilution), and getting an explicit explanation in place here that we could refer people to -- and that might correct anything I'm overlooking -- seems worthwhile. I could write an answer to myself as a starting point to provoke discussion, but I'd rather not lead the discussion toward my errors (if any) more than I must, so I'd rather wait for others to do so and just ask clarifying questions if needed.
    – keshlam
    Feb 5, 2023 at 19:36
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    A share is fractional ownership of a company, right? The corporate bylaws authorize the creation of an initial 8000 shares of stock. The Board of Directors authorizes an initial sale of 6000 shares. You buy 1000 shares, so own 16.67% of the company. The board authorizes the sale of the additional 2000 shares. Now your fraction is down to 12.5%, but each share is worth more. That is because the company is worth more due to all the extra cash. Is that what you’re asking?
    – RonJohn
    Feb 5, 2023 at 21:43
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    And I think the answer may just have been given: The company could set fire to it's computer center too, producing a loss, but doing so at the direction of an investor without a damned good reason is likely to draw fraud charges...
    – keshlam
    Feb 6, 2023 at 16:49
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    Yes a company that "gave away" part of its ownership would dilute other shareholders, but that would likely be illegal, fraudulent, or both. It is not part of "normal" business operations.
    – D Stanley
    Feb 6, 2023 at 16:50

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A share of stock - as you point out - is fractional ownership of a company. The terms of that ownership vary, but usually include voting on board members, a proportional share of any dividends, etc.

A company can generally create (issue) and sell new shares of stock as much as they want, subject to existing shareholder or board approval. This will dilute existing shareholders of course, but this doesn't necessarily mean the share price will go down. The company should be more valuable after this in total, as they got a huge pile of cash for those new shares.

Suppose the company has $100M in the bank, no employees, and no other assets. There are 1M shares of stock. Roughly you would expect those shares to be worth $100 each. Now the company issues and sells 500k more shares at the $100 market price. Now there are 1.5M shares and the company has $150M in the bank - still roughly $100 per share.

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  • Thanks; that does resolve some of confusion about how dilution works. Note that if the company repurchases its own shares, that winds up being the same transformation in the other direction.
    – keshlam
    Feb 8, 2023 at 19:30
  • Subsidiary question: If dilution occurs, what typically happens to dividends per share? Does the company wind up with more dividend costs per year, do they adjust the size of the dividend to distribute the same budget across the larger owner pool, or is this on a case by case basis? (I suspect the latter.)
    – keshlam
    Feb 8, 2023 at 19:32
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    @keshlam The company revisits their dividend decision based on the changed circumstances. Generally, a company would issue and sell shares if it needs cash for some reason and so a dividend may not make sense in that case. If the company issues stock to acquire another company, there may be no reason to change the total amount of the dividend, but that will result in less per share in the short term. Presumably, the company is only doing it because they believe it helps in the long term. Feb 10, 2023 at 3:25

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