What is a diluted share?
A diluted share refers to the state of a share after a company has added more shares to its pool of stock, i.e. after it has issued more common stock.
If your shares represented a certain percentage ownership of
What is a diluted share?
A diluted share refers to the state of a share after a company has added more shares to its pool of stock, i.e. after it has issued more common stock.
If your shares represented a certain percentage ownership of the company, that proportion will be reduced if more shares are issued – your shares will be ‘diluted’.
The increase in the number of shares outstanding may be the result of a primary market offering, including an IPO (initial public offering), the company’s workers exercising stock options, or the conversion of bonds, preferred shares or warrants into common stock. The primary market is where shares are issued for the first time.
Experts argue that each share is still worth $100. 1/20 of $2000 and 1/30 of $3000 both equal $100.
If your shares are diluted, they could affect your:
– earnings per share,
– voting control
– share value
– ownership percentage
Example of a diluted share
If you own one share in a company with 1,000 shares issued, trading at $50 each, you own 0.1% of that company.
If that company issued another 1,000 shares, your share would be ‘diluted’ by those new shares. Just like concentrated syrup is diluted when you add water.
If the company has not done anything to increase its value, your share could be worth less – 1/1000 of the business’ total value was worth more than the 1/2000 it is now worth. This means your share would probably no longer have a value of $50.
Many experts challenge this approach, saying that the company now has greater asset value after issuing additional shares, so the value of each share is likely to remain the same. Percentage 