Dilution (redirected from limit dilution)

Dilution

Diminution in the proportion of income to which each share is entitled.

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dilution

A decrease in the equity position of a share of stock because of the issuance of additional shares. Dilution is usually detrimental to the position of existing shareholders because it weakens their proportional claim on earnings and assets. See also potential dilution.

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Dilution. Dilution occurs when a company issues additional shares of stock, and as a result the earnings per share and the book value per share decline.

This happens because earnings per share and book value per share are calculated by dividing the total earnings or book value by the number of existing shares.

The larger the number of shares, the lower the value of each share. Lower earnings per share may trigger a selloff in the stock, lowering its price. That's one reason a company may choose to issue bonds rather than new stock to raise additional capital.

Similarly, if companies merge or one buys another, earnings may be diluted if they don't increase proportionately with the combined number of shares in the newly created company.

Dilution can also occur if warrants and stock options on a stock are exercised, and if convertible bonds and preferred stock the company issued are converted to common stock.

Companies must report the worst-case potential for such dilution, or loss of value, to their shareholders as diluted earnings per share.