"Stock dilution" is a term that is used to describe a phenomenon that occurs when more stock of a particular company is issued into the market. This has the effect of diluting the benefits of the stock holders and it can affect them in a number of ways. 

More Stock in the Market

Stock dilution occurs when more stock finds its way into the market. This could happen for a number of reasons. One example of more stock coming into the market is when a company decides to issue more stock that they have been holding in the company treasury. This can significantly increase the amount of shares that are available in the market.

Another way that new stock can come into the market is when other securities are converted into stock. For example, certain bonds, preferred stock, and warrants can be converted into shares of common stock under certain conditions. Employees can also exercise stock options that come out of the company treasury. All of these things will put more shares into the market and will dilute the shares that are already there.

Voting Control

One way that this can impact you as a shareholder is that it will skew voting control. When there are a fixed number of shares in the market, you know exactly how much voting control you have. Then when more stock is added to the mix, this lowers the amount of voting control that each shareholder has. If you had a significant amount of stock in the company, you might have lost a good portion of your ownership rights.

Valuation Multiples

Fundamental investors utilize valuation multiples when they are trying to determine whether a company is valued appropriately in the market. Many of these individuals use formulas known as valuation multiples to determine the value of a company. When a great deal of new shares of stock are added into the market, this will skew the results of these valuation multiples drastically. For example, earnings per share is a valuation multiple that is commonly used by investors. When you had thousands of shares of stock into the market but you keep the earnings the same, this can significantly lower the earnings per share. This can have the effect of making the stock look less valuable. At that point, the stock price may go down by a certain amount.

Impact to Investors

A large number of shares coming into the market can significantly impact the existing shareholders of the company. When shareholders find out about this occurrence, they will often try to sell their existing shares in the company as quickly as possible. If you are trying to decide what to do, you need to look at the company itself and try to determine if their long-term prospects are good. Even though it might be discouraging, you should not let stock dilution force you into selling a stock that you believe in. 

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