Dilution

Dilution is the reduction of ownership caused by the issuance of new stock or when stock options holders exercise their options. As the number of outstanding shares increases, each existing stockholder owns a smaller – or diluted – percentage of the company, AKA their stake is diluted.

When a company is divided into smaller pieces, current investors will consequently have a smaller piece of the overall pie. Dilution affects company ownership while also reducing the value of existing shares because the earnings per share are now lower.

Dilution can happen whenever a company is seeking more capital and issue new shares on the public market in order to do that.

The good part of dilution is that selling more shares can mean that a company’s profitability goes up and with it, its stock value.

But understandably, most shareholders aren’t fans of dilution. Sometimes companies will start a share repurchase program to cull the effects of dilution to keep their employees happy.

 

EXAMPLE:

Just like a glass of iced tea on a hot day, my shares in my company just experienced some hardcore dilution and I am not happy.