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I sometimes hear my investing friends talking about their investments being diluted down, but I've never had the courage to have one of them explain it to me.

From my perspective, if you buy 20% of something, that can't just be sold out from under you, can it? Then how could you be left with 10% or 15% later?

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Stock 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 have 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, employees exercising stock options, or by conversion of warrants into stock. This dilution can shift the fundamental position of the stock such as reduce previous ownership percentage, voting control, earnings per share, and the value of individual shares.

Sourse: Wikipedia

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    Consider clarifying that existing investors now own a smaller share of a bigger company (one that has more cash or has discharged a liability).
    – nanoman
    Jan 10 '20 at 2:52
  • I never knew stocks could be issued like that. I thought you bought a part of a pie, not a cake from a factory.
    – Weckar E.
    Jan 10 '20 at 4:15
  • A company usually does not issue shares for the entire company all at once. Often a controlling percentage is kept by the original owners. They might release an Initial Public Offering for maybe 25%, 45% or some other percentage - basically enough to raise the money they need for expansion. They then may do additional Public Offering to raise more money some years later. Also, they ofter issue options to employees and warrants to investment companies, which can later be swapped for shares in the company.
    – Victor
    Jan 10 '20 at 4:38
  • @WeckarE You still have the same amount of equity in the cake. The cake just gets bigger.
    – Jonast92
    Jan 10 '20 at 10:50
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Imagine you own 20% of a 5-acre corn field (1 net acre). The majority owner decides to buy the adjacent 5 acres and does so by selling equity (of which you buy none). You now own 10% of a 10-acre corn field, so do you now own a smaller amount?

You own a smaller percentage of a bigger pie - your investment should have roughly the same value.

Of course, there are many other variables that determine whether you actually own the same total amount or not - why was the stock diluted? Does the diluting event increase the value of the company more or less than than the dilution effect (e.g. did the company acquire another company that increases net value through economies of scale, etc.) or is this a desperation move to stay in business?

But you didn't have anything "sold out from under you". At worst you had some voting power taken away, but very few people have enough voting power in companies to make that an issue. Plus if that is a deal-breaker you could always either buy more shares or sell the ones you have.

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  • You had some voting power "sold out from under you"
    – Daniel
    Jan 10 '20 at 13:48
  • @Daniel true, but how many people buy stock for the voting power?
    – D Stanley
    Jan 10 '20 at 14:05
  • Most people don't, but OP was talking about buying "20% of something" so that's pretty significant voting power. Even if it doesn't apply in the OP's case, it's still a factor in some cases.
    – Daniel
    Jan 10 '20 at 15:19

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