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
- Why Cisco Stock Is Still a Value
- Should MannKind's Shareholders Buy Al Mann's New Company?
- Palo Alto Networks, Inc. Exceeds Expectations (Again)
- Is It Time to Buy United Parcel Service, Inc. Stock?
- 3 Reasons Lorillard Inc. Is a Top Dividend Stock
- 3 Biotech Stocks That Could Soar Even Higher