What's stock dilution?

QAStock 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 illconceived merger or to reward management or employees beyond what's reasonable, then value is being destroyed.

QAWhat's “dollar-cost averaging”?

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.

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