Definition of Dilutive Transaction
What does the term dilutive transaction mean? What is meant by the term dilutive transaction?
The dictionary defines dilution as "the process of making weaker or less concentrated".
When it comes to the stock market, dilution occurs when an increase is made to the number of shares outstanding in a company. This reduces earnings per share plus it reduces the size of existing ownership stakes in the company.
Let's give you an example of dilution.
XYZ currently has 100 million shares outstanding.
XYZ decides that they are going to raise some money to help pay for some expansion, so they decide to issue an additional 10 million shares in the company through a secondary offering.
This is a dilutive transaction, as earnings per share will be reduced (more shares equals less earnings per share) and existing ownership stakes will also be reduced as a % of the total company (for instance, somebody who held 10 million shares before the secondary will now own a 9.1% stake in the company, down from 10%).
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