Short definition: Dilution is the reduction in the ownership percentage or value of existing shareholders’ stock due to the issuance of new shares.
Explanation: It occurs when a company issues additional shares, thereby increasing the total number of shares outstanding. This can happen for various reasons, such as raising capital, issuing stock options to employees, or converting convertible securities into shares. Dilution can impact existing shareholders by decreasing their percentage ownership and potentially reducing the value of their shares.
Example: If a company has 1 million outstanding shares and issues an additional 100,000 shares, the existing shareholders’ ownership will be diluted by 10%.
Additional information (optional): While dilution can negatively impact existing shareholders in the short term, it can also be beneficial in the long run if the capital raised is used to fund growth and create value for the company. Investors should consider the reasons for dilution and its potential impact on the company’s future prospects before making investment decisions.