Share dilution refers to the decrease in the ownership percentage of existing shareholders in a company when new shares are issued. This can occur for various reasons, and it typically has a dilutive effect on the ownership and therefore the voting rights and earnings per share (EPS) of existing shareholders. Share dilution can be a result of the following situations:
Share dilution can affect existing shareholders in several ways:
To assess the impact of share dilution on an investment, investors often look at metrics like fully diluted earnings per share, which takes into account the potential dilution from outstanding share options, warrants, and convertible securities. It’s essential for investors (and companies) to consider the potential effects of share dilution when evaluating the long-term prospects of a company’s shares.
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