Term · Capital Measures & Financing
Dilution
In briefDilution occurs when additional or potential shares reduce the percentage stake or economic claim of existing shareholders. For capital-hungry small caps with repeated capital increases, it is among the most important ongoing risk factors.
Definition
Dilution refers to the reduction of the percentage stake or economic claim of existing shareholders through additional shares or potential shares.
How it is calculated
Formula. Ownership dilution = 1 - old share count / new fully diluted share count. Value dilution additionally depends on the issue price and the use of proceeds.
Why it matters for small caps
For capital-hungry small caps with repeated capital increases, it is one of the most important ongoing risk factors for shareholders.
Common misreadings
- Every capital increase is treated as equally harmful. The decisive factors are the issue price, subscription rights, purpose, return on the use of proceeds and the change in value per share.
In the process
Frequently asked
What is dilution?
It is the reduction of existing shareholders' stake when new shares are added. Both the voting right and the economic claim are affected.
How is dilution measured?
Ownership dilution follows from the ratio of the old to the new, fully diluted share count. Value dilution additionally depends on the issue price and the use of proceeds.
Is every capital increase equally harmful?
No, the decisive factors are the issue price, subscription rights, purpose and the return on the funds deployed. A sensibly used capital increase can even raise the value per share.
Related terms
Sources
Primary
IFRS Foundation – IAS 33 Earnings per Share
https://www.ifrs.org/issued-standards/list-of-standards/ias-33-earnings-per-share/
https://www.ifrs.org/issued-standards/list-of-standards/ias-33-earnings-per-share/
Methodology
Bundesministerium der Justiz – Aktiengesetz (AktG)
https://www.gesetze-im-internet.de/aktg/
https://www.gesetze-im-internet.de/aktg/
Education only, not investment advice. Ranges and thresholds are didactic orientation values, not an official standard.