Glossary

Dilution

Definition

Dilution refers to the reduction in ownership percentage of existing shareholders as a result of the issuance of additional shares.

Frequently Asked Questions

Q: How does dilution occur?

A: Dilution occurs when a company issues new shares, which increases the total number of outstanding shares. This increase in shares reduces the ownership percentage of existing shareholders.

Q: Why do companies issue additional shares?

A: Companies may issue additional shares for various reasons, such as raising capital for expansion, funding acquisitions, or rewarding employees through stock-based compensation.

Q: What are the effects of dilution on existing shareholders?

A: Dilution can have several effects on existing shareholders, including a decrease in their ownership percentage, a reduction in their voting power, and a potential decrease in the value of their shares.

Q: How is dilution calculated?

A: Dilution is calculated by dividing the number of new shares issued by the sum of the existing shares and the new shares. This calculation provides the dilution percentage, which represents the reduction in ownership percentage for existing shareholders.

Q: Can dilution be beneficial for existing shareholders?

A: In certain cases, dilution can be beneficial for existing shareholders if the capital raised through the issuance of new shares leads to significant business growth and increased profitability, resulting in a higher overall value for the company and its shares.

Q: How can shareholders protect themselves from dilution?

A: Shareholders can protect themselves from dilution by carefully reviewing a company's capital structure and understanding the terms of any potential future share issuances. Additionally, shareholders may have the opportunity to participate in new share offerings to maintain their ownership percentage.

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