Suppose company ABC has 100,000 shares at $10 each, and I have 10% of those shares, so own 10% of the company. I understand that a stock split would create 200,000 shares at $5 each, but the value of my holding – both in dollar value and percentage – doesn’t change.
How does stock dilution happen then, where I own a smaller percentage of the company without my selling any assets (obviously, the dollar value of my holdings would change based on the market)?
In: 5
The company has 100,000 shares and issues another 100,000 shares, so your stock is now diluted. This happens all the time when stock grants or options are issued for employees. It’s just normally on such a relatively small scale that the market doesn’t react.
Stock dilution is when a company issues more shares. Example. If you own 10% of a company with 100,000 shares outstanding and the company issues 100,000 more shares to raise money you’re original 10% owner ship is now only worth 5%. Companies diluting share holders sucks. You still have the same amount of shares and same dollar amount, they’re just worth less of your total ownership in the company.
Edit: further clarification
Stock splits you’re talking about don’t effect your ownership, so yeah not that. But a company can always print more stock (like a government printing more money) in order to raise capital to expand the business, but obviously it also means anybody who owns some shares now own less of the whole pie. You would hope the business is making good financial decisions when it prints more stock, so that the company grows with good financial decisions. But it depends a lot on whose leading the company. The flip side is that governments will usually let companies print more stock whenever they want but if it seems like a pattern of abuse then it opens the laws up to embezzlement/defrauding investors cases.
splits don’t dilute you bc you get the percentage equivalent of total shares bc your holdings split as well. when the company issues new shares and sells them on the open market (or uses them for acquisition) would be when it’s a dilution even. your % ownership in the company has decreased assuming you didn’t get any of the newly created shares.
you’re confusing up a stock split with stock offering/dilution
stock splits like you stated don’t affect your percentage of holdings and seems to be used mostly as a device to make a stock look cheaper for newer investors to buy in and also give the stock a lower price again so it may have more potential to go up in the future (no new slices of pie are added, the slices of pie just get cut smaller so more people van buy some of the pie and earnings is still shared with just fplks of 1 pie)
a dilution is when said company sells X amount of new stock to a private investor(s) or the public and increases the shares out there (another pie is added to your original pie and now you have to share earnings with the new pie folks)
While companies primarily sell shares to the public during their IPO, companies can do secondary offerings. Additionally, the offer stock options, etc. to employees that convert to new shares outstanding.
Dilution happens when the company issues shares (to another investor or to acquire a company or to pay employees with stock or similar things). The idea is that whatever the company bought hopefully makes the new bigger company more valuable than the dilution so owning 5% of the new company is preferable to owning 10% of the old company.
Sometimes that works out really well for the company that was diluted (Disney’s shareholders are probably pretty happy they bought Marvel after it churned out a zillion blockbusters) sometimes not so much (Time Warner shareholders gave up about 55% of the company in their merger with AOL).
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