Historically how do share prices perform after mass selling after an employee reward scheme?
Like others have already said, it may cause an immediate dip due to a large and sudden move in shares for that particular stock. However, if there is nothing else affecting the company's financials and investors perceive no other risks, it will probably bounce back a bit, but not back to the full value before the shares were issued. Why? Whenever a company issues more stock, the new shares dilute the value of the current shares outstanding, simply because there are now more shares of that stock trading on the market; the Earnings Per Share (EPS) Ratio will drop since the same profit and company value has to be spread across more shares. Example:  If a company is valued at $100 dollars and they have 25 shares outstanding, then the EPS ratio equates to $4 per share (100/25 = 4).  If the company then issues more shares (stock to employees who sell or keep them), let's say 25 more shares, then shares outstanding increase to 50, but the company's value still remains at $100 dollars. EPS now equates to $2 per share (100/50 = 2). Now, sometimes when shareholders (especially employees...and especially employees who just received them) suddenly all sell their shares, this causes a micro-panic in the market because investors believe the employees know something bad about the company that they don't. Other common shareholders then want to dump their holdings for fear of impending collapse in the company. This could cause the share price to dip a bit below the new diluted value, but again if no real, immediate risks exist, the price should go back up to the new, diluted value. Example 2: If EPS was at $4 before issuing more stock, and then dropped to $2 after issuing new stock, the micro-panic may cause the EPS to drop below $2 and then soon rebound back to $2 or more when investors realize no actual risk exists. After the dilution phase plays out, the EPS could actually even go above the pre-issuing value of $4 because investors may believe that since more stock was issued due to good profits, more profits may ensue. Hope that helps!
"This question is predicated on the assumption that investors prefer dividends, as this depends on who you're speaking to.  Some investors prefer growth stocks (some which don't pay dividends), so in this case, we're covering the percent of investors who like dividend paying stocks. It depends on who you ask and it also depends on how self-aware they are because some people may give reasons that make little financial sense.  The two major benefits that I hear are fundamentally psychological: Dividends are like mini-paychecks.  Since people get a dopamine jolt from receiving a paycheck, I would predict the same holds true for receiving dividends.  More than likely, the brain feels a reward when getting dividends; even if the dividend stock performs lower than a growth stock for a decade, the experience of receiving dividends may feel more rewarding (plus, depending on the institution, they may get a report or see the tax information for the year, and that also feels good). Some value investors don't reinvest dividends, as they believe the price of the stock matters (stocks are either cheap or expensive and automatic reinvestment to these investors implies that the price of a stock doesn't matter), so dividends allow them to rebuild their cash after a buy.  They can either buy more shares, if the stock is cheap, or keep the cash if the stock is expensive.  Think about Warren Buffett here: he purchased $3 billion worth of shares of Wells Fargo at approximately $8-12 a share in 2009 (from my memory, as people were shocked that be bought into a bank when no one liked banks).  Consider how much money he makes from dividends off that purchase alone and if he were to currently believe Wells Fargo was overpriced, he could keep the cash and buy something else he believes is cheaper.  In these cases, dividends automatically build cash cushions post buying and many value investors believe that one should always have cash on hand. This second point is a little tricky because it can involve risk assessment: some investors believe that high dividend paying stocks, like MO, won't experience the huge declines of indexes like the SPY.  MO routed the SPY in 2009 (29% vs. 19%) and these investors believe that's because it's yield was too desired (it feels safer to them - the index side would argue ""but what happens in the long run?"").  The problem I have with this argument (which is frequent) is that it doesn't hold true for every high yield stock, though some high yield stocks do show strong resistance levels during bear markets." "I'm not a financial expert, but saying that paying a $1 dividend will reduce the value of the stock by $1 sounds like awfully simple-minded reasoning to me. It appears to be based on the assumption that the price of a stock is equal to the value of the assets of a company divided by the total number of shares. But that simply isn't true. You don't even need to do any in-depth analysis to prove it. Just look at share prices over a few days. You should easily be able to find stocks whose price varied wildly. If, say, a company becomes the target of a federal investigation, the share price will plummet the day the announcement is made. Did the company's assets really disappear that day? No. What's happened is that the company's long term prospects are now in doubt. Or a company announces a promising new product. The share price shoots up. They may not have sold a single unit of the new product yet, they haven't made a dollar. But their future prospects now look improved. Many factors go into determining a stock price. Sure, total assets is a factor. But more important is anticipated future earning. I think a very simple case could be made that if a stock never paid any dividends, and if everyone knew it would never pay any dividends, that stock is worthless. The stock will never produce any profit to the owner. So why should you be willing to pay anything for it? One could say, The value could go up and you could sell at a profit. But on what basis would the value go up? Why would investors be willing to pay larger and larger amounts of money for an asset that produces zero income? Update I think I understand the source of the confusion now, so let me add to my answer. Suppose that a company's stock is selling for, say, $10. And to simplify the discussion let's suppose that there is absolutely nothing affecting the value of that stock except an expected dividend. The company plans to pay a dividend on a specific date of $1 per share. This dividend is announced well in advance. Everyone knows that it will be paid, and everyone is extremely confidant that in fact the company really will pay it -- they won't run out of money or any such. Then in a pure market, we would expect that as the date of that dividend approaches, the price of the stock would rise until the day before the dividend is paid, it is $11. Then the day after the dividend is paid the price would fall back to $10. Why? Because the person who owns the stock on the ""dividend day"" will get that $1. So if you bought the stock the day before the dividend, the next day you would immediately receive $1. If without the dividend the stock is worth $10, then the day before the dividend the stock is worth $11 because you know that the next day you will get a $1 ""refund"". If you buy the stock the day after the dividend is paid, you will not get the $1 -- it will go to the person who had the stock yesterday -- so the value of the stock falls back to the ""normal"" $10. So if you look at the value of a stock immediately after a dividend is paid, yes, it will be less than it was the day before by an amount equal to the dividend. (Plus or minus all the other things that affect the value of a stock, which in many cases would totally mask this effect.) But this does not mean that the dividend is worthless. Just the opposite. The reason the stock price fell was precisely because the dividend has value. BUT IT ONLY HAS VALUE TO THE PERSON WHO GETS IT. It does me no good that YOU get a $1 dividend. I want ME to get the money. So if I buy the stock after the dividend was paid, I missed my chance. So sure, in the very short term, a stock loses value after paying a dividend. But this does not mean that dividends in general reduce the value of a stock. Just the opposite. The price fell because it had gone up in anticipation of the dividend and is now returning to the ""normal"" level. Without the dividend, the price would never have gone up in the first place. Imagine you had a company with negligible assets. For example, an accounting firm that rents office space so it doesn't own a building, its only tangible assets are some office supplies and the like. So if the company liquidates, it would be worth pretty much zero. Everybody knows that if liquidated, the company would be worth zero. Further suppose that everyone somehow knows that this company will never, ever again pay a dividend. (Maybe federal regulators are shutting the company down because it's products were declared unacceptably hazardous, or the company was built around one genius who just died, etc.) What is the stock worth? Zero. It is an investment that you KNOW has a zero return. Why would anyone be willing to pay anything for it? It's no answer to say that you might buy the stock in the hope that the price of the stock will go up and you can sell at a profit even with no dividends. Why would anyone else pay anything for this stock? Well, unless their stock certificates are pretty and people like to collect them or something like that. Otherwise you're supposing that people would knowingly buy into a pyramid scheme. (Of course in real life there are usually uncertainties. If a company is dying, some people may believe, rightly or wrongly, that there is still hope of reviving it. Etc.) Don't confuse the value of the assets of a company with the value of its stock. They are related, of course -- all else being equal, a company with a billion dollars in assets will have a higher market capitalization than a company with ten dollars in assets. But you can't calculate the price of a company's stock by adding up the value of all its assets, subtracting liabilities, and dividing by the number of shares. That's just not how it works. Long term, the value of any stock is not the value of the assets but the net present value of the total future expected dividends. Subject to all sorts of complexities in real life." "This is such a common question here and elsewhere that I will attempt   to write the world's most canonical answer to this question. Hopefully   in the future when someone on answers.onstartups asks how to split up   the ownership of their new company, you can simply point to this   answer. The most important principle: Fairness, and the perception of   fairness, is much more valuable than owning a large stake. Almost   everything that can go wrong in a startup will go wrong, and one of   the biggest things that can go wrong is huge, angry, shouting matches   between the founders as to who worked harder, who owns more, whose   idea was it anyway, etc. That is why I would always rather split a new   company 50-50 with a friend than insist on owning 60% because ""it was   my idea,"" or because ""I was more experienced"" or anything else. Why?   Because if I split the company 60-40, the company is going to fail   when we argue ourselves to death. And if you just say, ""to heck with   it, we can NEVER figure out what the correct split is, so let's just   be pals and go 50-50,"" you'll stay friends and the company will   survive. Thus, I present you with Joel's Totally Fair Method to Divide Up The   Ownership of Any Startup. For simplicity sake, I'm going to start by assuming that you are not   going to raise venture capital and you are not going to have outside   investors. Later, I'll explain how to deal with venture capital, but   for now assume no investors. Also for simplicity sake, let's temporarily assume that the founders   all quit their jobs and start working on the new company full time at   the same time. Later, I'll explain how to deal with founders who do   not start at the same time. Here's the principle. As your company grows, you tend to add people in   ""layers"". The top layer is the first founder or founders. There may be 1, 2, 3,   or more of you, but you all start working about the same time, and you   all take the same risk... quitting your jobs to go work for a new and   unproven company. The second layer is the first real employees. By the time you hire   this layer, you've got cash coming in from somewhere (investors or   customers--doesn't matter). These people didn't take as much risk   because they got a salary from day one, and honestly, they didn't   start the company, they joined it as a job. The third layer are later employees. By the time they joined the   company, it was going pretty well. For many companies, each ""layer"" will be approximately one year long.   By the time your company is big enough to sell to Google or go public   or whatever, you probably have about 6 layers: the founders and   roughly five layers of employees. Each successive layer is larger.   There might be two founders, five early employees in layer 2, 25   employees in layer 3, and 200 employees in layer 4. The later layers   took less risk. OK, now here's how you use that information: The founders should end up with about 50% of the company, total. Each of the next five layers should end up with about 10% of the   company, split equally among everyone in the layer. Example: Two founders start the company. They each take 2500 shares. There are   5000 shares outstanding, so each founder owns half. They hire four employees in year one. These four employees each take   250 shares. There are 6000 shares outstanding. They hire another 20 employees in year two. Each one takes 50 shares.   They get fewer shares because they took less risk, and they get 50   shares because we're giving each layer 1000 shares to divide up. By the time the company has six layers, you have given out 10,000   shares. Each founder ends up owning 25%. Each employee layer owns 10%   collectively. The earliest employees who took the most risk own the   most shares. Make sense? You don't have to follow this exact formula but the basic   idea is that you set up ""stripes"" of seniority, where the top stripe   took the most risk and the bottom stripe took the least, and each   ""stripe"" shares an equal number of shares, which magically gives   employees more shares for joining early. A slightly different way to use the stripes is for seniority. Your top   stripe is the founders, below that you reserve a whole stripe for the   fancy CEO that you recruited who insisted on owning 10%, the stripe   below that is for the early employees and also the top managers, etc.   However you organize the stripes, it should be simple and clear and   easy to understand and not prone to arguments. Now that we have a fair system set out, there is one important   principle. You must have vesting. Preferably 4 or 5 years. Nobody   earns their shares until they've stayed with the company for a year. A   good vesting schedule is 25% in the first year, 2% each additional   month. Otherwise your co-founder is going to quit after three weeks   and show up, 7 years later, claiming he owns 25% of the company. It   never makes sense to give anyone equity without vesting. This is an   extremely common mistake and it's terrible when it happens. You have   these companies where 3 cofounders have been working day and night for   five years, and then you discover there's some jerk that quit after   two weeks and he still thinks he owns 25% of the company for his two   weeks of work. Now, let me clear up some little things that often complicate the   picture. What happens if you raise an investment? The investment can come from anywhere... an angel, a VC, or someone's dad. Basically, the   answer is simple: the investment just dilutes everyone. Using the example from above... we're two founders, we gave ourselves   2500 shares each, so we each own 50%, and now we go to a VC and he   offers to give us a million dollars in exchange for 1/3rd of the   company. 1/3rd of the company is 2500 shares. So you make another 2500 shares   and give them to the VC. He owns 1/3rd and you each own 1/3rd. That's   all there is to it. What happens if not all the early employees need to take a salary? A lot of times you have one founder who has a little bit of money   saved up, so she decides to go without a salary for a while, while the   other founder, who needs the money, takes a salary. It is tempting   just to give the founder who went without pay more shares to make up   for it. The trouble is that you can never figure out the right amount   of shares to give. This is just going to cause conflicts. Don't   resolve these problems with shares. Instead, just keep a ledger of how   much you paid each of the founders, and if someone goes without   salary, give them an IOU. Later, when you have money, you'll pay them   back in cash. In a few years when the money comes rolling in, or even   after the first VC investment, you can pay back each founder so that   each founder has taken exactly the same amount of salary from the   company. Shouldn't I get more equity because it was my idea? No. Ideas are pretty much worthless. It is not worth the arguments it would cause to   pay someone in equity for an idea. If one of you had the idea but you   both quit your jobs and started working at the same time, you should   both get the same amount of equity. Working on the company is what   causes value, not thinking up some crazy invention in the shower. What if one of the founders doesn't work full time on the company? Then they're not a founder. In my book nobody who is not working full   time counts as a founder. Anyone who holds on to their day job gets a   salary or IOUs, but not equity. If they hang onto that day job until   the VC puts in funding and then comes to work for the company full   time, they didn't take nearly as much risk and they deserve to receive   equity along with the first layer of employees. What if someone contributes equipment or other valuable goods (patents, domain names, etc) to the company? Great. Pay for that in   cash or IOUs, not shares. Figure out the right price for that computer   they brought with them, or their clever word-processing patent, and   give them an IOU to be paid off when you're doing well. Trying to buy   things with equity at this early stage just creates inequality,   arguments, and unfairness. How much should the investors own vs. the founders and employees? That depends on market conditions. Realistically, if the investors end   up owning more than 50%, the founders are going to feel like   sharecroppers and lose motivation, so good investors don't get greedy   that way. If the company can bootstrap without investors, the founders   and employees might end up owning 100% of the company. Interestingly   enough, the pressure is pretty strong to keep things balanced between   investors and founders/employees; an old rule of thumb was that at IPO   time (when you had hired all the employees and raised as much money as   you were going to raise) the investors would have 50% and the   founders/employees would have 50%, but with hot Internet companies in   2011, investors may end up owning a lot less than 50%. Conclusion There is no one-size-fits-all solution to this problem, but anything   you can do to make it simple, transparent, straightforward, and,   above-all, fair, will make your company much more likely to be   successful. The above awesome answer came from the Stack Exchange beta site for startups, which has now closed. I expect that this equity distribution question (which is strongly tied to personal finance) will come up more times in the future so I have copied the content originally posted.  All credit for this excellent answer is due to Joel Spolsky, a moderator for the Startups SE beta site, and co-founder of Stack Exchange." "There are no guarantees in the stock market. The index fund can send you a prospectus which shows what their results have been over the past decade or so, or you can find that info on line, but ""past results are not a guarantee of future performance"". Returns and risk generally trade off against each other; trying for higher than average results requires accepting higher than usual risk, and you need to decide which types of investments, in what mix, balance those in a way you are comfortable with. Reinvested dividends are exactly the same concept as compounded interest in a bank account. That is, you get the chance to earn interest on the interest, and then interest on the interest on the interest; it's a (slow) exponential growth curve, not just linear. Note that this applies to any reinvestment of gains, not just automatic reinvestment back into the same fund -- but automatic reinvestment is very convenient as a default. This is separate from increase in value due to growth in value of the companies. Yes, you will get a yearly report with the results, including the numbers needed for your tax return. You will owe income tax on any dividends or sales of shares. Unless the fund is inside a 401k or IRA, it's just normal property and you can sell or buy shares at any time and in any amount. Of course the advantage of investing through those special retirement accounts is advantageous tax treatment, which is why they have penalties if you use the money before retirement. Re predicting results: Guesswork and rule of thumb and hope that past trends continue a bit longer. Really the right answer is not to try to predict precise numbers, but to make a moderately conservative guess, hope you do at least that well, and be delighted if you do better... And to understand that you can lose value, and that losses often correct themselves if you can avoid having to sell until prices have recovered. You can, of course, compute historical results exactly, since you know how much you put in when, how much you took out when, and how much is in the account now. You can either look at how rate of return varied over time, or just compute an average rate of return; both approaches can be useful when trying to compare one fund against another... I get an approximate version of this reported by my financial management software, but mostly ignore it except for amusement and to reassure myself that things are behaving approximately as expected. (As long as I'm outperforming what I need to hit my retirement goals, I'm happy enough and unwilling to spend much more time on it... and my plans were based on fairly conservative assumptions.) If you invest $3k, it grows at whatever rate it grows, and ten years later you have $3k+X. If you then invest another $10k, you now have $3k+X+10k, all of which grows at whatever rate the fund now grows. When you go to sell shares or fractional shares, your profit has to be calculated based on when those specific shares were purchased and how much you paid for them versus when they were sold and how much you sold them for; this is a more annoying bit of record keeping and accounting than just reporting bank account interest, but many/most brokerages and investment banks will now do that work for you and report it at the end of the year for your taxes, as I mentioned." It really depends.  If it is offered as compensation (ie in leiu of, or in addition to salary or cash bonus) then it would be reportable income, and if sold later for a profit then that would be taxable as gains.  If this share is purchased as an investment at current value then it would be treated like other securities most likely gains realized at sale.  Any discount could be considered income but there are some goofy rules surrounding this enacted to prevent tax evasion and some to spur growth.  That is the answer in a nut shell.  It is far more complicated in reality as there are somewhere around 2000 pages of regulations deal with different exceptions and scenerios. "What you are describing is a very specific case of the more general principle of how dividend payments work. Broadly speaking, if you own common shares in a corporation, you are a part owner of that corporation; you have the right to a % of all of that corporation's assets. The value in having that right is ultimately because the corporation will pay you dividends while it operates, and perhaps a final dividend when it liquidates at the end of its life. This is why your shares have value - because they give you ownership of the business itself. Now, assume you own 1k shares in a company with 100M shares, worth a total of $5B. You own 0.001% of the company, and each of your shares is worth $50; the total value of all your shares is $50k. Assume further that the value of the company includes $1B in cash. If the company pays out a dividend of $1B, it will now be only worth $4B. Your shares have just gone down in value by 20%! But, you have a right to 0.001% of the dividend, which equals a $10k cash payment to you. Your personal holdings are now $40k worth of shares, plus $10k in cash. Except for taxes, financial theory states that whether a corporation pays a dividend or not should not impact the value to the individual shareholder.  The difference between a regular corporation and a mutual fund, is that the mutual fund is actually a pool of various investments, and it reports a breakdown of that pool to you in a different way. If you own shares directly in a corporation, the dividends you receive are called 'dividends', even if you bought them 1 minute before the ex-dividend date. But a payment from a mutual fund can be divided between, for example, a flow through of dividends, interest, or a return of capital. If you 'looked inside' your mutual fund you when you bought it, you would see that 40% of its value comes from stock A, 20% comes from stock B, etc etc., including maybe 1% of the value coming from a pile of cash the fund owns at the time you bought your units.  In theory the mutual fund could set aside the cash it holds for current owners only, but then it would need to track everyone's cash-ownership on an individual basis, and there would be thousands of different 'unit classes' based on timing. For simplicity, the mutual fund just says ""yes, when you bought $50k in units, we were 1/3 of the year towards paying out a $10k dividend. So of that $10k dividend, $3,333k of it is assumed to have been cash at the time you bought your shares. Instead of being an actual 'dividend', it is simply a return of capital.""  By doing this, the mutual fund is able to pay you your owed dividend [otherwise you would still have the same number of units but no cash, meaning you would lose overall value], without forcing you to be taxed on that payment. If the mutual fund didn't do this separate reporting, you would have paid $50k to buy $46,667k of shares and $3,333k of cash, and then you would have paid tax on that cash when it was returned to you. Note that this does not ""falsely exaggerate the investment return"", because a return of capital is not earnings; that's why it is reported separately.  Note that a 'close-ended fund' is not a mutual fund, it is actually a single corporation. You own units in a mutual fund, giving you the rights to a proportion of all the fund's various investments. You own shares in a close-ended fund, just as you would own shares in any other corporation. The mutual fund passes along the interest, dividends, etc. from its investments on to you; the close-ended fund may pay dividends directly to its shareholders, based on its own internal dividend policy." "My question boiled down: Do stock mutual funds behave more like   treasury bonds or commodities? When I think about it, it seems that   they should respond the devaluation like a commodity. I own a quantity   of company shares (not tied to a currency), and let's assume that the   company only holds immune assets. Does the real value of my stock   ownership go down? Why? On December 20, 1994, newly inaugurated President Ernesto Zedillo   announced the Mexican central bank's devaluation of the peso between   13% and 15%.  Devaluing the peso after previous promises not to do so   led investors to be skeptical of policymakers and fearful of   additional devaluations. Investors flocked to foreign investments and   placed even higher risk premia on domestic assets. This increase in   risk premia placed additional upward market pressure on Mexican   interest rates as well as downward market pressure on the Mexican   peso.  Foreign investors anticipating further currency devaluations   began rapidly withdrawing capital from Mexican investments and selling   off shares of stock as the Mexican Stock Exchange plummeted. To   discourage such capital flight, particularly from debt instruments,   the Mexican central bank raised interest rates, but higher borrowing   costs ultimately hindered economic growth prospects. The question is how would they pull this off if it's a floatable currency.  For instance, the US government devalued the US Dollar against gold in the 30s, moving one ounce of gold from $20 to $35.   The Gold Reserve Act outlawed most private possession of gold, forcing   individuals to sell it to the Treasury, after which it was stored in   United States Bullion Depository at Fort Knox and other locations. The   act also changed the nominal price of gold from $20.67 per troy ounce   to $35. But now, the US Dollar is not backed by anything, so how do they devalue it now (outside of intentionally inflating it)?  The Hong Kong Dollar, since it is fixed to the US Dollar, could be devalued relative to the Dollar, going from 7.75 to 9.75 or something similar, so it depends on the currency. As for the final part, ""does the real value of my stock ownership go down"" the answer is yes if the stock ownership is in the currency devalued, though it may rise over the longer term if investors think that the value of the company will rise relative to devaluation and if they trust the market (remember a devaluation can scare investors, even if a company has value). Sorry that there's too much ""it depends"" in the answer; there are many variables at stake for this.  The best answer is to say, ""Look at history and what happened"" and you might see a pattern emerge; what I see is a lot of uncertainty in past devaluations that cause panics." They put their stock on the market that people then purchased, if they don't put that stock out there then I suspect those people will just buy the stock from somewhere, so really no harm was caused to any individual that would have been prevented otherwise.   It's not great, and shouldn't be done as market asssumtry isn't good. I think the punishments for if aren't to right any sort of wrongdoing, it's to act as a deterrent.