dilution
The reduction in existing shareholders' ownership percentage caused by the issuance of new shares.
Example
“When the company issued new shares to raise capital, existing shareholders experienced dilution.”
Memory Tip
Like diluting juice with water — adding new shares DILUTES the ownership of existing shareholders.
Why It Matters
Dilution directly affects your ownership stake and voting power in a company you have invested in. If you own 100 shares of a company and it issues 100 new shares, your percentage ownership drops from 50 percent to 33 percent, reducing your claim on future profits and dividends even if the company performs well.
Common Misconception
Many investors believe dilution only happens when they do not buy new shares themselves. In reality, dilution occurs automatically whenever the company issues new shares for any reason, whether you participate or not, and your ownership percentage shrinks regardless of your actions.
In Practice
Suppose you own 1,000 shares of a company with 10,000 total shares outstanding, giving you 10 percent ownership. The company then issues 5,000 new shares to raise capital, bringing the total to 15,000 shares. Your 1,000 shares now represent only 6.7 percent ownership, and your voting power and earnings per share have been proportionally reduced.
Etymology
From Latin 'diluere' meaning 'to wash away' — existing ownership is washed away by new shares.
Common Misspellings
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See Also
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