Stock Dilution
Stock dilution is the reduction in existing shareholders' ownership percentage that occurs when a company issues new shares.
Dilution happens when a company increases its number of shares. Each existing shareholder still owns the same number of shares, but those shares now represent a smaller percentage of the company. Earnings and voting power are spread across more shares.
Common causes include secondary offerings to raise cash, employee stock options and restricted stock awards, conversion of convertible bonds or preferred stock, exercise of warrants, and acquisitions paid for with stock.
Dilution is not automatically bad. If a company raises money and invests it well, the value of the whole business can grow enough to make each smaller slice worth more than before. But if new shares are issued cheaply or the money is used poorly, existing shareholders lose out. That is why investors pay attention to how fast the share count is rising.
Analysts track dilution through diluted earnings per share, which accounts for securities that could become shares, and through changes in shares outstanding over time.
Example: you own 1,000 of a company's 100,000 shares, or 1%. If the company issues 25,000 new shares, you own 1,000 of 125,000 shares, or 0.8%.