More Stocks: Yea or Nay?

Q My proxy voting materials show that one of my holdings wants to issue more stock. Should I vote for or against that? — C.N., Mobile, Alabama

A It depends. Many investors frown on additional stock issuances, because that can dilute the value of existing shares.

This simplified example can help you understand how: Imagine that MacDonald Farms Inc. (ticker: EIEIO) has just 100 shares of stock outstanding, and you own 10 shares, or 10%. If it issues 20 more shares, it will have a new total of 120 shares, and your 10 shares now represent only 8.3% of the company. The value of your shares appears to have dropped.

The issuance of additional stock isn’t always terrible, though. Sometimes it’s for a stock split, or for employee stock options.

If the additional shares are issued in order to buy another company in a well-structured deal, adding them may be a smart move: The acquisition might add much more value to the company than the cost of the additional shares. If a company uses the money raised to grow its business effectively, shareholders can still win.

Q What’s negative amortization? — H.D., online

A When you decrease a loan balance (such as a mortgage balance) over time by making payments toward it that cover interest charges and part of the principal, that’s amortization.

Sometimes, though, your mortgage payment may not cover the interest due. That results in negative amortization, where your loan balance grows instead of shrinking because the unpaid interest is added to your principal.

Negative amortization is a feature of adjustable-rate mortgages that offer low minimum payment options, leaving borrowers owing greater sums and sometimes ending up facing foreclosure.