Types of Dilution: Value

Value dilution occurs when a company issues new shares at a price lower than its current market value, reducing the value of existing shareholders’ holdings.

This happens because the new shares increase the total number of outstanding shares without a proportional increase in the company’s value, leading to a decrease in earnings per share.

For example, if Alpha Corp has one million outstanding shares and an earnings of two million dollars for the year, its earnings per share will be two dollars per share.

If the company issues two hundred thousand new shares, the total outstanding shares increase to one million two hundred thousand.

Alpha Corp.'s earnings may not increase in proportion to the rise in the number of shares.

As a result, existing investors' earnings per share will decrease to approximately one dollar and sixty-seven cents per share.

Alpha Corp can ensure that newly issued shares contribute to growth by funding projects that increase revenue and profitability. 

Before making an investment decision, investors should assess whether the company’s share issuance is creating or destroying value.