Definition
Dilution occurs when a company issues new shares, reducing existing shareholders' ownership percentage and potentially earnings per share. Dilution happens through secondary offerings, convertible securities, employee stock options, and acquisition stock payments. While dilution reduces percentage ownership, it's not necessarily bad if the capital raised creates value exceeding the dilution. Investors should monitor potential dilution from outstanding options and convertibles. Accretive transactions add value; dilutive ones reduce it.
Formula
Example
A company with 100M shares issues 20M new shares for an acquisition. Existing shareholders now own 83% of a larger company. If the acquisition doesn't create sufficient value, the dilution destroys shareholder value.
FAQ
What is Dilution?
Reduction in existing shareholders' ownership percentage when new shares are issued.
How do you calculate Dilution?
A common formula for Dilution is: Diluted Ownership = Original Shares / (Original + New Shares)
Why is Dilution important?
Dilution helps investors evaluate corporate actions and make more informed decisions.