Stock dilution occurs when more shares are added to the pool of stock (outstanding shares) that is already trading in the open market. You can think of it like how the U.S. government prints money which increases the total number of dollars in circulation which lowers the value of the dollar. Instead, it’s the company that “prints” money, or in this case, stock, which lowers the value of their stock and increases the total number of outstanding shares.
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Stock dilution, also known as equity dilution, is the decrease in existing shareholders’ ownership of a company as a result of the company issuing new equity. New equity increases the total shares outstanding which has a dilutive effect on the ownership percentage of existing shareholders. This increase in the number of shares outstanding can result from a primary market offering (including an initial public offering), employees exercising stock options, or by issuance or conversion of convertible bonds, preferred shares or warrants into stock. This dilution can shift fundamental positions of the stock such as ownership percentage, voting control, earnings per share, and the value of individual shares. A broader definition specifies dilution as any event that reduces an investor's stock price below the initial purchase price.