What is a Distribution Stock?

Distribution stocks are stock offerings that sold over an extended period of time. This is in contrast to selling the shares of stock in a single transaction. By selling a block of available stock in smaller increments, there is much less chance of creating an adverse effect in the marketplace and possibly causing a reduction in the market price associated with the stock. Companies also sometimes make use of distribution stock as a means of testing the market response to something new that the company is doing with their operation.

One of the main advantages of distribution stock is that this gradual release over time of available shares helps to minimize the chances of the market place becoming flooded with shares of the same stock. When the number of available shares becomes much greater than the demand for those shares, the unit price per share is likely to drop. By breaking the new block of shares into smaller groupings, it is possible to release a few new shares now, a few more in a few weeks, and a few more next month. This gradual trickling of the shares into the marketplace is less likely to create a flood situation and the unit price of the shares of stock is much more likely to remain constant and possibly even increase.

Investors also benefit when distribution stock is issued. Individuals and entities that already hold significant shares of the same stock have a vested interest in making sure the stock offering retains is current value and remain poised for rising in value. If too many shares hit the marketplace in a short period of time, the result is that current investors begin to experience downturn in the worth of their investment.

Some may even feel the downturn is permanent and begin to try to sell off their shares. Unfortunately, this often has the effect of driving the price per share down even further and enhancing the negative impact for investors who choose to hang on to their shares. When market conditions indicate this is the likely response, going with a distribution stock approach greatly minimizes the chances of fueling an adverse reaction.

While distribution stock is often a wise move, it is not always the best possible solution for the stock under consideration. A company may assess current market conditions and determine that it is in the best interests of both the business and the current investors to release larger blocks of stock for purchase. In both cases, achieving the desired effect involves knowing the market well and projecting the response accurately.