What is dilution of shares
Diminution in the proportion of income to which each share is entitled. Issing new shares often causes dillution.
A decrease in the equity position of a share of stock because of the issuance of additional shares. Dilution is usually detrimental to the position of existing shareholders because it weakens their proportional claim on earnings and assets. See also potential dilution .
Dilution occurs when a company issues additional shares of stock, and as a result the earnings per share and the book value per share decline.
This happens because earnings per share and book value per share are calculated by dividing the total earnings or book value by the number of existing shares.
The larger the number of shares, the lower the value of each share. Lower earnings per share may trigger a selloff in the stock, lowering its price. That's one reason a company
may choose to issue bonds rather than new stock to raise additional capital.
Similarly, if companies merge or one buys another, earnings may be diluted if they don't increase proportionately with the combined number of shares in the newly created company.
Dilution can also occur if warrants and stock options on a stock are exercised, and if convertible bonds and preferred stock the company issued are converted to common stock.
Companies must report the worst-case potential for such dilution, or loss of value, to their shareholders as diluted earnings per share.
What Does Dilution mean?
A reduction in earnings per share of common stock that occurs as a result of an issuance of additional shares or through the conversion of convertible securities into additional common shares.
Investopedia explains Dilution
Adding to the number of shares outstanding reduces the value of the holdings of existing shareholders.Source: financial-dictionary.thefreedictionary.com