Dilution is an investment phenomenon that occurs when a company increases the number of shares of its stock, either through issuance of new stock or conversion of Convertible Securities.
Dilution is typically viewed by investors as a negative occurrence. An investor's holding in a company is immediately devalued when a company dilutes its stock. A dilution increases the supply of stock available while not affecting earnings, essentially splitting its earnings between more investors.
Dilution can also indicate financial weakness in the company itself, as a company may be forced to resort to dilution to pay its debt if it has no other options available.
Conversely a share buyback is typically viewed by investors as positive, as after a buyback takes place (reducing the supply of available shares for said company) an investor's shares now net the the investor a larger percentage of the company's earnings. A buyback may also be seen as a sign of confidence by the company, as the company is indicating that it believes itself to be undervalued.
Recent Mentions on Fool.com
- Wal-Mart Looks to Endure Short-Term Pain for Long-Term Gain
- Accenture Stock: Stumbling Out of a Slow 2015 Into a Brighter Tomorrow?
- Can Shake Shack Bounce Back From Last Week's 12% Drop?
- Why Cypress Semiconductor Corporation Fell 14.8% in September
- Why Avon Products, Inc. Stock Dropped 37.4% in September
- 3 Rock-Solid Dividend Stocks in Energy