Finance: What is Dilution?

What is dilution? Dilution happens when a company’s outstanding shares increase, meaning that stockowners now own a smaller percentage of the company. This increase in shares happens because the company has either issued new shares, or options have been exercised.

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Transcript

00:28

marketing vendor sell my butt off.com for a million shares. well her stock had

00:32

been trading at 12 bucks a share for a total market valuation of 240 million

00:37

dollars .see we get that 12 times 20 million. but then after printing 3 [equation]

00:42

million more shares to buy her competitors,

00:45

well she now has 23 million slices of pie .and yes that's how it works!

00:49

companies can essentially just go to the Xerox machine and print shares of their

00:53

own stock, that they didn't formerly own. but now she has 23 million shares [printer prints shares]

00:57

outstanding and not 20 million. so at $12 a share the stock market is valuing her

01:02

company at a meaningfully higher price. 12 times 23 million is 276 million. it's

01:07

saying that the value of the three million share dilutions she took in

01:12

buying something dot-com and Sell my butt off.com [woman waves to camera]

01:16

was the difference between the 276 million in the 240 million or 36 million

01:21

bucks. but let's say the market value had stayed flat at 240 million. well now with

01:26

23 million shares out the stock is only worth 10 dollars and 43 cents a share,

01:30

instead of the previous $12 a share. in other words shares have been diluted

01:37

each share of whatever com is no longer worth as much as it used to be. that pie

01:42

isn't looking quite as appetizing now is it? [man frowns in kitchen wearing apron]