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
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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