Stock Dilution 101: Why Your Shares Keep Shrinking

When a company issues new shares, your ownership percentage gets smaller—that’s stock dilution. Here’s what you need to know:

The Two Types

Primary dilution: Company prints new shares to raise cash. Your slice of the pie shrinks immediately. Secondary dilution: Existing shareholders dump their shares to new buyers. Impact depends on the sale price.

How It Hits Your Portfolio

• Ownership %: Drop from 5% to 3%? You lost voting power and control
• Stock price: Usually tanks because total company value spreads across more shares
• EPS (Earnings Per Share): Falls when profits are divided by more shares. Lower EPS = less attractive to investors
• Dividends: Payments per share often decrease as the share count balloons

The Defense: Anti-Dilution Clauses

Smart investors demand protection:

• Ratchet provisions: Adjusts conversion prices downward if new shares are issued cheaper
• Weighted average: Protects you based on average price of new issuance
• Full ratchet: Maximum protection—your conversion price adjusts to match the cheapest new shares

The Bottom Line

Stock dilution isn’t always bad—companies need capital to grow. But it does weaken your ownership stake and can tank stock value. Before investing, ask: Is management planning a huge offering? Are there anti-dilution protections? Understanding this difference separates smart investors from bag holders.