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 Veeva Systems Inc. Tumbled Today
- Why Autohome Inc Stock Revved Up Today
- 3 Bank Stocks to Buy in March
- 8 Top Stocks to Buy in March
- Warren Buffett Keeps Buying IBM Stock: Should You Follow Him?
- Wisdom from Warren Buffett?s Golden Anniversary Letter