In financial terms, what does "dilution" refer to?

"Dilution" in financial terms specifically refers to the reduction in ownership percentage for existing shareholders. This typically occurs when a company issues additional shares of stock. For instance, if a company has a total of 1,000 shares outstanding and decides to issue another 500 shares, existing shareholders will now own a smaller proportion of the total shares. Their ownership stake decreases from 100% of 1,000 shares to 100% of 1,500 shares, effectively reducing their influence and claim on the company's assets and earnings.

This concept is critical for investors, as it affects their voting power and the value of their investment in the context of a company's overall market capitalization. Understanding dilution is essential when analyzing a company's financing activities, particularly in relation to equity financing strategies.