share dilution
The reduction in existing shareholders' ownership percentage when new shares are issued through stock offerings, option exercises, or convertible securities.
Example
“The secondary offering diluted existing shareholders by 15% — each share now represented a smaller ownership percentage.”
Memory Tip
SHARE DILUTION = more shares = each share worth less of the whole pie.
Why It Matters
Share dilution directly affects the value of your ownership stake in a company. If you own 100 shares of a company with 1,000 total shares and the company issues 1,000 new shares, your ownership percentage drops from 10 percent to 5 percent even though you still hold the same 100 shares. This matters because it can reduce your voting power and your claim on future earnings.
Common Misconception
Many people think that share dilution only happens when a company is doing poorly. In reality, companies issue new shares for many reasons including funding growth, acquiring other businesses, or compensating employees through stock options. A successful, growing company may dilute shares regularly as part of normal business operations.
In Practice
Suppose you purchase 1,000 shares of a startup when it has 10,000 total shares outstanding, giving you a 10 percent stake. The company then raises $5 million by issuing 5,000 new shares to investors. Your ownership is now diluted to 6.67 percent because you still own 1,000 shares but the company now has 15,000 total shares. Your voting power and proportional claim on company profits have been reduced by about one-third.
Etymology
SHARE (ownership unit) DILUTION (weakening through addition). Adding shares DILUTES existing shareholders' percentage.
Common Misspellings
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