At the place I work, I have occasionally written letters to my co-workers which I lay out in the break room. I’m not sure how popular or welcomed they are, but writing them seems to me to be a positive release to the frustrations of working there. Not only is there issues with management, but “union brothers” are not infrequently responding to the issues by turning on each other. Ideally, I hope the letters provide encouragement to unite as a union, because that is the only way to get better conditions.
Recently, the stock of the company I work for had a reverse split. Talking with my co-workers on the dock, they were saying they could not believe the stock jumped up so much in one day - a misunderstanding of what a split means. I tried to explain that the value of the stock had not changed. So many of the workers found this confusing, I attempted to write this article explaining it so they could see it at work.
I thought I’d go over the basic idea of stock ownership. I am not trying to pretend that the Stock Market is easy, nor that the Market is not corrupt and essentially rigged, but at its base, stock prices are about Value. When you purchase stock in a company, it is not the same thing as putting money on Polythene Pam in the fifth race, though some approach it that way. By buying stock, you are becoming part owner of a company. Your share is one of many shares of stock a company has outstanding and the total of shares multiplied by the stock price is the Value the market has placed on the company.
For the sake of illustration and round figures are easier, let’s say there is a company worth $10,000 with 1,000 shares total and you own 100 shares. Your share is worth $1,000.
Total Value Total Shares Per Share Your Shares Your Value
$10,000 1,000 $10 100 $1,000
Now, let’s say that the company decides to just increase the number of shares by 9,000. This is not a split, but the company is just adding more shares to the market. The term for this is dilution. Total Value is the same, but the per share Value goes down.
Total Value Total Shares Per Share Your Shares Your Value
$10,000 10,000 $1 100 $100
Then the company decides 10,000 shares is too many and decides on a 10/1 reverse split, by which the number of shares is reduced, but the price goes up by the same factor. All ownership goes down proportionally.
Total Value Total Shares Per Share Your Shares Your Value
$10,000 1,000 $10 10 $100
Let’s say that this company, like ours, did this same process a second time. This is how it looks.
Total Value Total Shares Per Share Your Shares Your Value
$10,000 1,000 $10 1 $10
As you can see, the individual stock holder has taken a bath. What has dilution done to your original $1,000 to make it $10? In our company’s case, those new shares were given to banks and other creditors to shore up the company debt. In other words, Stockholders' money was taken from their stock and given to the bankers. Our company has diluted its stock then reverse split their shares twice in the past three years. But that is not all. While in my example, the total value of the company has remained the same, there has also been corporate decisions which resulted in the Market having a smaller perceived Value of the company.
This shows why it was so wrong that the board of directors recently voted themselves pay increases justifying its decision by saying their stock options under-performed. The point of stock options as compensation is to reward wise business decisions which increase Value. The board actively decreased Value and think they deserve reward anyway. When I started at here seven years ago, the stock price was almost $70/share. Multiplying by the splits, the recent stock close of $5.70 is the equivalent of $0.0009/share (0.0013% of its former Value).