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   Dilution
   















 

D

Dilution

The process by which the participation of equity owners in the earnings and market value increase of a company is reduced through the issuance or prospective issuance of new common stock or participating instruments. Warrants or other convertible securities issued by a corporation have a potential diluting effect on earnings per share, because they can lead to new share issuance. Exchange-traded options or third party options or warrants do not dilute earnings because they are exercised into existing shares. In practice, unless a warrant or convertible issued by the company is quite large (relative to the common stock equivalent capitalization), the dilution effect is not a major consideration in the valuation of the underlying or derivatives on the underlying. Except for rare cases where a warrant or other convertible is sold or exchanged at less than a fair market price, dilution gets more analytical attention than it deserves. See Warrant Dilution, Warrant.

Glossary * D