Dilution

Dilution: a reduction of a shareholder’s ownership percentage in the company because new shares are issued to a third party (such as an investor). Dilution can also occur when holders of share options (such as company employees) exercise their options. When the overall number of shares increases, each existing shareholder will own a smaller, or diluted, percentage of the company, and such shareholder’s voting power will be diminished. However, the potential upside of share dilution is that the additional capital the company receives from issuing additional shares can improve the value of the company’s shares and its profitability.