Stock Dilution
The reduction in existing shareholders' ownership percentage and earnings per share that occurs when a company issues additional shares.
What is Stock Dilution?
Stock dilution occurs when a company increases its total share count by issuing new shares, reducing the proportional ownership of existing shareholders and typically decreasing earnings per share. Common sources of dilution include secondary stock offerings, employee stock option exercises, convertible bond conversions, and share-based compensation. Dilution is a cost borne by existing shareholders because it reduces their claim on the company's earnings and assets relative to what they held before. Investors monitor diluted EPS — which assumes all dilutive securities are exercised or converted — as a more conservative measure of profitability than basic EPS. Heavy dilution from equity compensation plans is a particular concern in technology and early-stage companies.
Example
In 2021, electric vehicle startup Lucid Group completed a SPAC merger that resulted in significant share issuance. Subsequent secondary offerings and warrant exercises over the following two years increased the total share count from roughly 1.7 billion to over 2.2 billion shares — a 30% increase that diluted existing shareholders' ownership proportionally. Lucid's EPS became increasingly negative partly because net losses were spread across a growing share count.
Source: Investopedia — Dilution