Dilution

Dilution happens when a company issues new shares, which reduces the percentage of the company each existing share represents. If you own 1% of a company and it doubles its share count, you still own the same number of shares, but now only about 0.5% of the company, since the total ownership pie is now split more ways.

Companies create new shares for several reasons: raising cash through a secondary stock offering, paying employees with stock options or restricted stock units instead of cash, or converting bonds into stock later on. Whatever the reason, existing shareholders end up owning a smaller slice of both the company and its future earnings, even though nothing about the business itself changed.

This is why companies report a diluted version of key metrics like earnings per share and shares outstanding, alongside the basic version. The diluted figure assumes all of these potential future shares already exist, giving a more conservative, worst-case picture of what each existing share is really worth.