Why it matters
In an investment context, equity dilution means a reduction in an owner’s relative share when the total number of shares increases. Potential dilution is also considered when analyzing earnings per share if instruments can become ordinary shares. The effect depends on the issue price, the resources received by the company and the terms of the instruments.
Example
If an investor owned all 100 shares of a hypothetical company and another 25 were then issued to other participants, the investor’s share would fall to 80% without participation in the issue. This does not automatically mean that the value of the holding falls by the same amount: the company may have received money and invested it in a useful project.
Common distinction
Dilution should not be confused with a stock split, in which relative ownership usually remains unchanged. It is useful to study the purpose of the issue, the rights of existing shareholders and the potential new shares. High company profit by itself does not protect an owner from a change in their share. Related reading: [shares](/guides/shares/), [earnings per share](/glossary/pribyl-na-akciyu/) and [market capitalization](/glossary/rynochnaya-kapitalizaciya/).