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Video transcript

let's say we've got a company here that has exactly let's say that it has exactly four shares just to simplify things obviously very few companies have only four shares but this will simplify the explanation and let's say that each of those shares right now they are trading in the market or I guess we could say the last transaction that's occurred in trading in these shares they are trading at two dollars a share two dollars two dollars per share so the market is saying that each of those shares are worth two dollars there's a four of these shares in total and we're going to assume that this company has no liabilities so the shareholders just outright own the assets so if there's four of these shares times two dollars the market is saying that this company's assets are worth exactly eight dollars eight dollars right over here eight dollars the the asset value of the market value of the assets is the same thing as a market cap in this case because we have no liabilities now what I want to think about is what happens if the company wants to raise some more money let's say that they want to let's say that they want to issue some more shares and sell them to raise some money to buy a factory or whatever so they literally do is the board approves for them to literally create two more shares the board they create two more shares so now they have a total of six shares outstanding and then the company goes they get an investment banker and they do a secondary offering in the public markets and they sell these incremental shares and they're able to sell them let's just say for simplicity simplicity at two dollars per share at two dollars per share normally when you increase the supply a little bit you won't get quite what the previous market value was but you get roughly two dollars a share two dollars a share for simplicity and by selling two shares that it just created for two dollars a share the company is able to raise another another four dollars so the whole reason why I'm going through this exercise is to ask a question did die Lucian did die Lucian take place and there's different ways to thinking when you think about dilution it's like you could imagine if you have a sweet syrup and if you add water to it it becomes less sweet as each kind of cube of that water each drop of that water has less sugar in it you've diluted it and so there seems to be an analogy here we now have more shares for the same company and it is true if you were the owner of this share over here before before the share offering up here you owned 25% of the company after the share offering you own 1/16 so not 1/16 1/6 so after you own 1/6 or approximately 16% so it looks like the percentage that you own of the company has been diluted and that's true to some degree but sometimes the dilution takes on another meaning that somehow because more shares are being used it for the ownership of the same company that maybe these shares are worth less and that's the one thing I want to challenge there is dilution in the percentage you own but there is not diluted in what the shares are worth because before if you had four shares representing something that is worth eight dollars now you have six shares representing something that is twelve dollars because the company didn't just issue these shares and get nothing in return for it it got four dollars of cash you can't debate the value of four dollars four dollars or worth four dollars so now the assets of the company are worth twelve dollars so you have twelve dollars of assets no liabilities six shares twelve dollars divided by six years is still two dollars a share so the value per share has not been diluted just the percentage of the company that you happen to own