Dilution occurs when a company issues new stock. As the number of new company shares increases, the ownership of existing shareholders decreases. Additional equity increases the number of shares outstanding, which in turn, dilutes the ownership percentage of existing investors.
Dilution can happen for a variety of reasons, including:
- Raising a new round of preferred stock
- Granting stock options to employees
- The conversion of convertible notes
- An initial public offering (IPO)
Dilution can significantly shift important shareholder positions, including the value and earnings of shares, voting power, and ownership percentage.