Stock Dilution

Definition

A reduction in an existing shareholder's proportionate ownership when additional shares are issued. The effect on value or earnings per share depends on the transaction and what the company receives in return.

Dilution can occur when a company raises money by selling new shares or issues shares to employees. Existing holders who receive none of the new shares own a smaller percentage of the company. The effect on the value of their holdings also depends on what the company gets in exchange.

Example

You own 10 of Company A’s 100 shares. The company issues 100 new shares and you still own 10. Your ownership falls from 10% to 5%.