Stock dilution occurs when a company issues additional shares, reducing the ownership percentage of existing shareholders. This commonly happens through secondary offerings, employee stock option exercises, convertible bond conversions, and stock-based compensation plans. While dilution reduces each shareholder's proportional claim on earnings and assets, it can be beneficial if the capital raised generates returns exceeding the dilution cost.

The dilution percentage is calculated as: Dilution % = New Shares Issued / (Current Shares + New Shares Issued) x 100. Diluted EPS is recalculated by spreading total earnings across the larger share count: Diluted EPS = (Current EPS x Current Shares) / New Total Shares. This gives investors a clearer picture of per-share profitability after the issuance.

For example, if a company has 10 million shares outstanding and issues 2 million new shares, the dilution percentage is 16.67%. An existing shareholder who owned 100% of the original shares now owns only 83.33% of the company. If the current EPS was $3.50, the diluted EPS drops to approximately $2.92, a decrease of 16.67%. Investors should weigh this dilution against the purpose and expected return of the capital raise.