Dilution

A reduction in existing shareholders' ownership percentage from issuing new shares.

What Is Dilution?

Dilution occurs when a company issues new shares, increasing the total number of outstanding shares. This reduces each existing shareholder's percentage ownership of the company and decreases EPS (since the same earnings are now spread across more shares).

Common Sources of Dilution

• Stock-based compensation: Companies grant stock options and RSUs to employees. When exercised, new shares are created.
• Secondary offerings: Companies sell new shares to raise capital. Common for growth-stage companies that need funding.
• Convertible bonds: Bondholders can convert their bonds into shares, creating new stock.
• Acquisitions: Companies pay for acquisitions by issuing new shares to the target company's shareholders.

Why Dilution Matters for Earnings

Heavy dilution can mask underlying business strength. A company might show strong revenue growth but flat EPS because stock-based compensation is creating new shares that dilute earnings. This is why sophisticated investors always check the diluted share count trend — is it growing, stable, or shrinking (through buybacks)?