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Stock Trading Stock Trading Strategy & Education
Dilution
By Akhilesh Ganti
Reviewed by Somer Anderson
Updated Feb 19, 2021
What Is Dilution?
Dilution occurs when a company issues new shares that result in a decrease in existing stockholders' ownership percentage of that company. Stock dilution can also occur when holders of stock options, such as company employees, or holders of other optionable securities exercise their options. When the number of shares outstanding increases, each existing stockholder owns a smaller, or diluted, percentage of the company, making each share less valuable.
A share of stock represents equity ownership in that company. When a firm's board of directors decides to take their company public, usually through an initial public offering (IPO), they authorize the number of shares that will be initially offered. This amount of outstanding stock is commonly referred to as the "float." If that company later issues additional stock (often called secondary offerings) they have increased the float and therefore diluted their stock: the shareholders who bought the original IPO now have a smaller ownership stake in the company than they did prior to the new shares being issued.
Key Takeaways
Dilution is the reduction in shareholders' equity positions due to the issuance or creation of new shares.
Dilution also reduces a company's earnings per share (EPS), which can have a negative impact on share prices.
Dilution can occur when a firm raises additional equity capital, though existing shareholders are usually disadvantaged.
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