DEFINITION of 'Dilution'

A reduction in the ownership percentage of a share of stock caused by the issuance of new 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 will own a smaller, or diluted, percentage of the company, making each share less valuable. Dilution also reduces the value of existing shares by reducing the stock's earnings per share.


Loading the player...


Suppose a company has issued 100 shares to 100 unique shareholders. Each shareholder owns 1% of the company. If the company then has a secondary offering and issues 100 new shares to 100 more unique shareholders, each shareholder will only own 0.5% of the company. The smaller ownership percentage also diminishes each investor's voting power.

Share dilution may be imminent any time a company needs additional capital. The potential upside of share dilution is that the additional capital the company receives from issuing additional shares can improve the company's profitability and the value of its stock.

  1. Employee Stock Option - ESO

    A stock option granted to specified employees of a company. ESOs ...
  2. Outstanding Shares

    A company's stock currently held by all its shareholders, including ...
  3. Full Ratchet

    An anti-dilution provision that, for any shares of common stock ...
  4. Anti-Dilution Provision

    A provision in an option or a convertible security. It protects ...
  5. Wash-Out Round

    A common round of financing to owners of small companies that ...
  6. Convertibles

    Securities, usually bonds or preferred shares, that can be converted ...
Related Articles
  1. Investing

    A Breakdown Of Stock Buybacks

    Find out what these company programs achieve and what it means for stockholders.
  2. Investing Basics

    How Does Dilution Work?

    Dilution refers to the reduction in the percentage equity ownership of a company due to additional equity being issued to other owners.
  3. Investing Basics

    Stock Basics Tutorial

    If you're new to the stock market and want the basics, this is the tutorial for you!
  4. Forex Education

    The Dangers Of Share Dilution

    Investors need to be aware of the existence of dilutive securities and how they can affect existing shareholders.
  5. Chart Advisor

    2 Short-Term and 2 Longer-Term Trade Ideas

    Two shorter-term and two longer-term trade ideas to consider, based on trends and the possibility of a breakout.
  6. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  7. Chart Advisor

    ChartAdvisor for November 27 2015

    Weekly technical summary of the major U.S. indexes.
  8. Economics

    Investing Opportunities as Central Banks Diverge

    After the Paris attacks investors are focusing on central bank policy and its potential for divergence: tightened by the Fed while the ECB pursues easing.
  9. Chart Advisor

    Pay Attention To These Stock Patterns Playing Out

    The stocks are all moving different types of patterns. A breakout could signal a major price move in the trending direction, or it could reverse the trend.
  10. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  1. How are rights distributed in a rights offering?

    In a rights offering, rights are distributed to shareholders based on the number of shares they already own. What Is a Rights ... Read Full Answer >>
  2. How does private placement affect share price?

    Private placement is a common method of raising business capital through offering equity shares. Private placements can be ... Read Full Answer >>
  3. How does debt affect a company's beta?

    The average debt/equity ratio for the Internet sector is small, at 0.32 for the first quarter of 2015, and an average of ... Read Full Answer >>
  4. Why is an increase in capital stock on a company's balance sheet a bad sign for stockholders?

    An increase in the total of capital stock showing on a company's balance sheet is bad for investors, because it represents ... Read Full Answer >>
  5. How do you calculate diluted EPS using Excel?

    Diluted earnings per share (EPS) is the EPS calculated using all convertible securities. Diluted EPS takes basic EPS and ... Read Full Answer >>
  6. Why do share prices fall after a company has a secondary offering?

    The best way to answer this question is to provide a simple illustration of what happens when a company increases the number ... Read Full Answer >>
  7. What is dilutive stock?

    Dilutive stock is any security that dilutes the ownership percentage of current shareholders - that is, any security that ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  2. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  3. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  4. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  5. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  6. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
Trading Center