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What Is Share Dilution?

Steven Levine, Founder of TickerPosts and OpenClassActions.com1 min readLast reviewed

Share dilution happens when a company's share count increases or when securities exist that can become shares later. More shares mean each existing share represents a smaller ownership slice.

Common sources of dilution

Dilution can come from several places:

  • Public or private stock offerings.
  • Employee stock compensation.
  • Stock options and restricted stock units.
  • Warrants.
  • Convertible debt or preferred stock.
  • Shares issued for acquisitions.

Some dilution can be reasonable if it funds valuable growth. The question is whether the new capital creates enough value to offset the smaller ownership percentage.

Why dilution affects per-share numbers

Investors often focus on per-share metrics such as EPS and free cash flow per share. If total earnings stay the same but the share count rises, earnings per share falls.

That is why a company can grow as a business while existing shareholders receive less benefit than expected. The pie may grow, but the number of slices can grow too.

Where to look for dilution risk

Check the latest 10-K, 10-Q, 8-K, and registration statements. Look for share-count changes, stock-based compensation, at-the-market offering programs, warrants, convertible notes, and language about future financing needs.

If a post says a low-priced stock has huge upside but never discusses dilution, slow down and read the filings.

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