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Share dilution

Share dilution is the decrease in existing shareholders' ownership percentage of a company as a result of the company issuing new equity.[1]

If new shares are issued at a price at least equal to the current market value of the company's outstanding shares, existing shareholders do not experience an economic loss.[2] They simply own a smaller percentage of a now larger company, and although their proportional voting rights decline, their wealth is not diluted.[2]

When new shares are issued at a price below the pre-existing market value, existing shareholders may experience economic dilution unless they participate in the offering.[3] Shareholders can preserve both their voting power and their economic position by buying a proportional number of the newly issued shares.[3] This mechanism is commonly reflected in preemptive rights and rights offerings.[3]

In a follow-on offering, also called a subsequent offering or a dilutive secondary offering, the company itself places new shares onto the market, which dilutes the existing shares.[4] This differs from a secondary market offering, where a large block of previously issued shares is sold and the proceeds go to the holders selling them, not to the issuing company.[5]

Why it matters to investors

When a company places new shares on the market in a follow-on offering, the existing shares are diluted.[4] Whether existing shareholders also face economic dilution depends on whether the new shares are issued below the pre-existing market value and whether those shareholders take part in the offering.[3]

Sources

  1. Paul, Jeron (2016-10-18). "Dilution 101: A Startup Guide to Equity Dilution with Real-World Statistics" . Capshare Blog . Archived from the original on 2019-10-14 . Retrieved 2016-10-19 . web.archive.org (via Wikipedia: Stock dilution)
  2. Brealey, Richard A.; Myers, Stewart C.; Allen, Franklin (2020). Principles of Corporate Finance (13th ed.). McGraw-Hill. p. 406. "If shares are issued at fair market value, existing shareholders do not lose wealth; their ownership is diluted in percentage terms but not in economic value." (via Wikipedia: Stock dilution)
  3. Damodaran, Aswath (2012). Investment Valuation (3rd ed.). Wiley. p. 687. "Issuing shares below market value transfers wealth from existing shareholders to new investors unless existing holders have preemptive rights allowing them to buy new shares to maintain their ownership percentages." (via Wikipedia: Stock dilution)
  4. "Follow-On Offering (FPO) Definition" . investopedia.com; "Learn About Secondary Offerings" . investopedia.com (via Wikipedia: Secondary market offering)
  5. "FINRA glossary definition of secondary offering" . Financial Industry Regulatory Authority . 2010 . Retrieved September 24, 2010 . finra.org (via Wikipedia: Secondary market offering)

Checked 8 October 2026. How we check sources