Dilution

In our example, the company has 100 shares with equal rights, of which you own 10. The company issues another 25 and you buy none. You now own 10/125 = 8% rather than 10%. That is a decline of 2 percentage points, or a relative reduction of 20% in your stake. Yet total shares increased by 25%. These percentages have different bases, so they differ. Growing corporate assets do not themselves reverse the fall in your ownership percentage. With different voting classes, share counts need not match voting power. [1] [2]

Our simplified example starts with net tangible assets of 100 USD and 100 shares. USD means US dollars. An intangible item might be a patent recorded in the accounts; liabilities are amounts the company owes. This means the book value of assets after subtracting intangible items and liabilities, not the market value of the whole company. Issuing 20 shares at 2 USD raises 40 USD. The new figure is 140/120, about 1.1667 USD per share instead of 1. The original owner has a smaller percentage, but this accounting metric rose. With issuance costs of 4 USD, it becomes 136/120, about 1.1333. Price and costs matter alongside share count. This is neither a share-price forecast nor automatically created profit. [2]

A prospectus is a document describing the company, the share offering and its risks to investors. SEC is the US Securities and Exchange Commission. At an IPO, the first public offering of shares, read the dilution table carefully. The SEC explains that it compares what new investors pay with book value and with the average price paid by earlier shareholders. In our preceding example, a new investor pays 2 USD, but post-issue net tangible book value is about 1.1667 USD per share. The difference of 0.8333 USD is about 41.67% of the issue price. This compares a price with an accounting metric; it is not the same calculation as the reduction in existing owners’ stakes. Nor is it a certain immediate stock-market loss. [2]

IAS 33, the accounting standard for earnings per share, also considers potential shares. They can arise from options and warrants, rights to buy or obtain shares on specified terms, or from converting debt into shares. Our example has 100 actual shares and 20 unexercised warrants, each for one share. A holder of 10 shares still owns 10% of existing shares. After full exercise, that would be 10/120, about 8.33%. Whether new shares actually appear depends on terms, price and settlement method. A potential count used in a calculation is not automatically the legal share count today. [3]

EPS is short for earnings per share. The example uses profit attributable to common shares and, for simplicity, gives both halves of the period equal weight. The share count therefore reflects how long the shares were outstanding. Our own example earns 300 USD and has 100 shares in the first half of the year, then 200 in the second. The weighted average is 150 shares, giving basic EPS of 2 USD. Dividing by the final 200 would incorrectly give 1.5. For diluted EPS, IAS 33 considers potential additional shares and, depending on the instrument, adjusts earnings in the numerator too, for example for relevant interest after allowing for tax. It excludes instruments with the opposite effect: increasing earnings or reducing loss per share from continuing operations, the business not reported as discontinued. Excluding such an instrument does not mean it cannot dilute ownership later. [7] [3]

Some offerings allow existing shareholders to participate proportionately. In our example, 100 existing shares are joined by 50 new ones. The owner of 10 buys another 5 and now holds 15/150 = 10%. Without buying, the stake would be only 10/150, about 6.67%. Maintaining ownership is not free and requires access to the offer. In documents available through SEC EDGAR, the public US regulatory filings database, check price, eligibility, deadline and whether rights can be transferred. The same pre-emptive right is not guaranteed for every issuance or country. [6]

A stock split divides shares into more units without itself changing ownership percentages. In our example, a 2:1 split turns 100 shares into 200 and your 10 into 20. Your stake remains 10%. An ordinary sale of an existing share between investors does not increase total shares either: the owner changes, not the size of the share pool. This differs from the company selling newly issued shares. Market prices can respond to supply and demand, but price movement alone does not establish a change in ownership percentage. [4] [2]

Bitcoin per Share, or BPS, compares corporate bitcoin with a defined share count. BTC is the unit symbol for bitcoin. Strategy is a company that holds bitcoin. Our own example starts with 100 BTC and 100 shares. After buying 20 BTC and issuing 30 shares, BPS is 120/130, about 0.9231: a fall of 7.69%, although BTC rose by 20%. Strategy uses its own Assumed Diluted Shares for the gross ratio, including assumed future shares; this differs from diluted EPS rules. Nonconvertible debt, which does not turn into shares, can increase gross BPS without an issuance, but adds a senior obligation. Always name the metric and the claims it leaves aside. With an unchanged share count, BPS rises if the company borrows and uses the proceeds to buy more bitcoin. The gross metric does not subtract this debt from holdings. The creditor still has a claim paid ahead of common shareholders in a liquidation. [5]