Business, Legal & Accounting Glossary
Dilution is an investment phenomenon that occurs when a company increases the number of shares of its stock, either through the issuance of new stock or conversion of Convertible Securities.
Dilution is the reduction of fractional ownership of each of a company’s existing shareholders by the issuance of additional shares. A common method of dilution is the conversion to common stock of other securities, such as convertible bonds or preferred stock. Dilution also occurs when new shares are issued because the company sells more shares to the public, or pays for an acquisition with shares.
Dilution is typically viewed by investors as a negative occurrence. An investor’s holding in a company is immediately devalued when a company dilutes its stock. A dilution increases the supply of stock available while not affecting earnings, essentially splitting its earnings between more investors.
Dilution can also indicate financial weakness in the company itself, as a company may be forced to resort to dilution to pay its debt if it has no other options available.
Conversely, a share buyback is typically viewed by investors as positive, as after a buyback takes place (reducing the supply of available shares for said company) an investor’s shares now net the investor a larger percentage of the company’s earnings. A buyback may also be seen as a sign of confidence by the company, as the company is indicating that it believes itself to be undervalued.
An anti-dilution clause may allow current shareholders to avoid dilution and preserve their fractional ownership by providing the right to buy a proportional number of shares upon any issuance of new shares to other shareholders. In many states, the anti-dilution clause, or anti-dilution provision, must be in the corporation’s charter to be regarded as valid.
Also, in law:
A situation in which a famous trademark or service mark is used in a context in which the mark’s reputation for quality is tarnished or its distinction is blurred. In this case, trademark infringement exists even though there is no likelihood of customer confusion, which is usually required in cases of trademark infringement. For example, the use of the word Candyland for a pornographic site on the Internet was ruled to dilute the reputation of the Candyland mark for the well-known children’s game, even though the traditional basis for trademark infringement (probable customer confusion) wasn’t an issue.
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This glossary post was last updated: 4th August, 2021 | 2 Views.