© 2016 Shmoop University, Inc. All rights reserved.

Finance Glossary

Just call us Bond. Amortized bond.

Over 700 finance terms, Shmooped to perfection.

Dilution

Definition:

If you pour a bunch of cream into black coffee, you dilute the coffee—it's tastier, yes, but it's not just coffee anymore.

Same deal with stocks. The more shares a company has outstanding, the more the company is owned by other people and the more diluted it is—which means that each person with stock owns a tinier chunk of the pie.

Example

If a company has 50 million shares outstanding and grants 10 million options with a low strike price, it has diluted itself about 20% because the options will be exercised and—presto!—the company now has 60 million shares outstanding. Early stage start-up companies usually have stock option plans so most "suffer" dilution because they're trying to raise cash for growing the company.