Stock dilution explained
Q. What’s stock dilution? — C.N., Brattleboro, Vermont
A. Stock dilution is what happens when a company increases its number of shares outstanding, shrinking the value of existing shares. Remember that each share of common stock represents an actual ownership stake in a company, albeit a small one. When there are suddenly more shares, each share’s claim is smaller.
Here’s a simplified example illustrating this: Imagine that Scruffy’s Chicken Shack (ticker: BUKBUK) has just 100 shares outstanding, and you own 10, or 10% of the company. If Scruffy’s issues 25 more shares, your 10 will only be 8% of the company.
Issuing additional shares isn’t necessarily a bad thing to do, if it raises money that’s used to grow the company. But if the shares are issued to finance an ill-conceived merger or to reward management or employees beyond what’s reasonable, then value is being destroyed.
Q. What’s “dollar-cost averaging”? — S.B., Custer, South Dakota
A.
It’s when you regularly invest a set sum over time. So, for example, you might invest $1,000 in Home Surgery Kits (ticker: OUCHH) stock every three months. You’d do this regardless of the stock price — for example, buying 20 shares when the price is $50 per share and 25 shares when it’s $40.
Note that you’ll be buying more shares when the stock price is lower, and fewer shares when it’s higher. Dollar-cost averaging is a good way to accumulate shares if your budget is limited, or if you’re not confident enough to invest a big chunk of money all at once, lest the market suddenly head south.
Having a percentage of your salary regularly deposited into a 401(k) account and invested is a form of dollar-cost averaging.
How to improve your retirement
Most of us are looking forward to retirement, but it may not be as comfortable and pleasant as you think, unless you prepare well for it. The average monthly Social Security retirement check was only $1,909 as of January, amounting to less than $23,000 for the year; you’ll want more than that. Here are some steps to take.
Save aggressively. Some recommend socking away 10% of your income, but if you’re late to the game, you may need to save much more. Note that your earliest invested dollars are your most powerful, as they have the most time to grow.
Pay down debts. If you’re saddled with high-interest-rate debt, such as from credit cards, aim to pay it off as soon as you can. You’ll save a lot in interest, and you may be able to enter retirement without that debt. (Mortgage debt is less problematic, but it can be nice to be free of those payments in retirement, too.)
Remember to factor health care costs into your plans. According to Fidelity, in 2024, each person age 65 or older “may need approximately $157,500 saved (after tax) to cover health care expenses in retirement.”
Make good use of tax-advantaged retirement accounts such as traditional and Roth IRAs and 401(k)s. If your employer offers matching 401(k) contributions, contribute at least enough to max that out.
Invest effectively. For longterm wealth-building, it’s hard to beat the stock market. And a quick, easy and effective way to invest in stocks is via one or more low-fee, broad-market index funds, such as ones that track the S&P 500.
Once you have retirement accounts growing, don’t cash them out prematurely. When you change jobs, you can usually roll over such accounts into ones at your new employer or into IRAs. Accounts with tens of thousands of dollars can be worth hundreds of thousands after many years — especially if you keep contributing to them.