What dilution means for you as a shareholder
For you as a shareholder, dilution means that your percentage share of the company decreases if you do not take part in the share issue. It can affect both your voting power and your share of future dividends or sale proceeds.
How hard the dilution hits depends on the terms of the issue, the subscription price and whether you are able to protect your position through pre-emption rights or other mechanisms.
How dilution normally occurs and is handled
Dilution is the result of changes in the number of shares and can be affected by several factors.
- New shares are issued in a share issue
- Existing owners who do not take part get a smaller ownership stake
- Pre-emption rights can make it possible to preserve your stake
- The subscription price affects how large the dilution is
- An increase in the company's value can offset the negative effect
By understanding these connections, you can better judge when dilution is acceptable and when it should be avoided.
When dilution becomes relevant
Worth bearing in mind
Dilution becomes relevant when the company raises new capital by increasing the number of shares, for example through new share issues, directed share issues or the conversion of loans into shares. Owners who do not take part in the process then end up with a smaller share of the company than before.
At the same time, dilution is not necessarily negative. If the capital injection is used effectively, the company's total value can increase, which over time can outweigh the reduction in ownership stake.
Frequently asked questions
Is dilution always negative?
No, if the capital is used to create growth, the value of the investment can increase despite a smaller ownership stake.
Can I avoid dilution entirely?
In practice only by taking part in share issues in proportion to your existing holding.
What is the difference between dilution and loss of value?
Dilution concerns your share of the company, whereas loss of value refers to a decrease in market value.
Does dilution affect voting rights?
Yes, a smaller ownership stake normally also means a smaller share of the votes, unless there are different share classes.
How do I know how large the dilution will be?
It is set out in the terms of the issue and can be calculated by comparing the number of new shares with the total number after the issue.