Dilution is the issuance of new shares that reduces existing shareholders' percentage ownership. Learn how dilution affects penny stocks and what to watch.
Dilution happens when a company issues new shares, increasing the total share count and reducing the percentage of the company that each existing share represents. For penny stocks, dilution is especially common because cash-strapped companies frequently raise capital through equity offerings.
The math is unforgiving: a profitable trade can still lose money if the share count grows faster than the company's value. A stock at $1.00 with 50M shares ($50M market cap) trading at $1.20 after a 100M-share offering at $0.50 still implies a $150M market cap on a company that just took $50M in cash — the per-share value typically settles below pre-offering levels.