Dilution

In it’s simplest conceptual form, stock dilution is basically a company adding more water to a pot of soup, but not adding more ingredients.

The company issues new shares of stock in order to raise capital.

You own 100 shares of a company. If the company suddenly creates more shares of stock and sells them to raise funds, your 100 shares don’t go away, they just represent a smaller ownership stake in the business because there are more total shares now.

Companies do this for many reasons. Maybe they need cash. Maybe they want to acquire another business. Whatever the reason, the result is the same. All shareholder ownership gets diluted.

Is This Bad?

If the company uses this new capital to grow revenue and becomes more profitable, your diluted ownership could end up being worth more in the future. This is an outcome dependent on good management having ideas that will work out in the future.

If the company wastes the new capital, this fundraising attempt will harm the value of the stock and as an investor, you lose out and must cry for days and days.

-Zac

Photo and cooking: Oliva Keck