Dilution

published 27 May 2018

In the world of finance, dilution means something is being watered down, typically earnings per share (see separate definition).

Warrants, share options and other convertible securities issued by a corporation have a potentially diluting effect on earnings per share because more shares are created without any boost to earnings.

Say, for example, a company has 100 shares in issue and earnings of £20. EPS is 20p. It then issues a further 100 shares to meet demand from options being exercised. Since there is no associated change in earnings, the revised EPS figure is now £20/200 or just 10p.