Stock dilution, also known as equity dilution, is the decrease in existing shareholders' ownership percentage of a company as a result of the company issuing new equity. New equity increases the total shares outstanding which has a dilutive effect on the ownership percentage of existing shareholders. This increase in the number of shares outstanding can result from a primary market offering (including an initial public offering), employees exercising stock options, or by issuance or conversion of convertible bonds, preferred shares or warrants into stock. This dilution can shift fundamental positions of the stock such as ownership percentage, voting control, earnings per share, and the value of individual shares.

Control dilution describes the reduction in ownership percentage or loss of a controlling share of an investment's stock. Many venture capital contracts contain an anti-dilution provision in favor of the original investors, to protect their equity investments. One way to raise new equity without diluting voting control is to give warrants to all the existing shareholders equally. They can choose to put more money in the company, or else lose ownership percentage. When employee options threaten to dilute the ownership of a control group, the company can use cash to buy back the shares issued.

The measurement of percent dilution is calculated at a specific point in time. Because it depends on market prices and assumptions about convertibility, the resulting figure changes as market values change and should not be interpreted as a permanent or comprehensive “measure of the impact” of dilution. The standard approach used in diluted EPS calculations under U.S. GAAP follows the steps outlined below:

Earnings dilution refers to the decline in earnings per share (EPS) that occurs when a company’s total share count increases. The concept is closely tied to control dilution, since both involve estimating how many additional shares would exist if potentially dilutive securities—such as options, warrants, or convertible debt—were assumed to convert.

Under U.S. GAAP, diluted EPS is calculated by estimating the net increase in shares that would result if all dilutive securities were converted at the beginning of the reporting period. This incremental share count, determined using the standard dilution methods, is added to the number of shares already outstanding at the start of the period. The company’s net income is then divided by this higher share figure.

Finance literature emphasizes that these calculations rely on market values at the beginning of the period, not at the end, because the dilution effect reflects the assumptions used in the treasury-stock and if-converted methods. In other words, the impact comes from the change in share count—not from any return the company might earn by reinvesting the cash proceeds associated with the assumed conversions.

Accounting guides make this distinction clear: diluted EPS reflects only the share dilution effect and excludes hypothetical investment gains on the proceeds from option exercises or debt conversions.

Value dilution describes the reduction in the current price of a stock due to the increase in the number of shares. This generally occurs when shares are issued in exchange for the purchase of a business, and incremental income from the new business must be at least the return on equity (ROE) of the old business. When the purchase price includes goodwill, this becomes a higher hurdle to clear.