Stock sales generally aren't good for existing shareholders

Q: What happens to the price of a stock after a company sells additional shares to the public, as Valero Energy vlo did?

A: Generally, more stock means a lower stock price.

Just as companies couldn't seem to borrow enough a few years ago, now they can't seem to pay off their debt fast enough.

Led largely by banks and other financial institutions, companies continue to raise record amounts of cash this year, much of it by selling new shares of stock to the public. You can read more here about the cash-raising binge.

When a company says it's going to sell more shares of stock, that's usually not a great thing for existing shareholders. The supply of stock will increase, and greater supply, given static demand, means lower prices. With more shares, the ownership stake in the company accorded each share is also reduced.

So, the stock market's reaction to Valero Energy's plans to sell 40 million shares of stock at $18 a share is pretty typical: Negative. Shares of Valero closed at $22.38 on June 2, the day before the company announced the stock sale and said it is likely to lose money in the second quarter. The stock now is trading down more than 20% from that level.

But not all the reaction can be blamed on the stock sale in this case. The sale only increased Valero's number of shares outstanding by about 8%. The rest of the negative reaction is due to the other factors facing the business.

It's important to note that in some cases, albeit rare, investors might be encouraged by a stock sale. The recent moves by banks, for instance, to sell stock was seen as positive. The sales gave the banks more cash, reduced their reliance on the government and proved investors were still willing to provide fresh cash. Shares of many banks rallied after they sold additional stock.

Matt Krantz is a financial markets reporter at USA TODAY and author of Investing Online for Dummies. He answers a different reader question every weekday in his Ask Matt column at money.usatoday.com. To submit a question, e-mail Matt at mkrantz@usatoday.com. Click here to see previous Ask Matt columns. Follow Matt on Twitter at: twitter.com/mattkrantz

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