What is dilution?
This refers to when an existing shareholder finds their stake in a company has become smaller - or been diluted - as more securities have been issued. As the total number of instruments is now greater, the existing investor now owns less of the company.
Where have you heard about dilution?
You may have heard about this concept in any situation where a listed-company has decided to issue extra shares. This is normally because the organisation wants to release extra capital.
What you need to know about dilution.
Dilution is not normally welcomed by shareholders, for several reasons. Firstly, as their stake in the company has become proportionally smaller, their votes on key decisions hold less sway. Secondly, the existing instruments also fall in value. This is because the earnings per share is reduced. To mitigate this, companies may decide to give information about extra securities in the future before they have actually been issued. This gives existing investors the chance to plan ahead and buy/sell accordingly.
Find out more about dilution.
Dilution may happen when a company's employees take up options on their shares.