What is Equity Dilution and its impact

In this article, you will come to know the meaning of Equity Dilution with its impact, nature and methods of usage of equity dilution. This article also clarifies that what should be the limit of equity dilution for favorable results.

Equity Dilution

Equity Dilution is done by companies to assure that most of the investors can buy the costly shares of the company. The shareholders who are already having the shares of that company have to be more aware during this period.

Companies declare the dilution of their shares from time to time. Most of the companies keep on making its planning. The purpose of equity dilution is to assure that more and more investors can purchase the shares of the company, while the people already having the shares of the company are required to be more aware. In such a situation, it is necessary that the investor make an evaluation that the company has to take such a decision of dilution due to which circumstances and what is the importance of dilution for them in real sense or what will be the impact of dilution upon them.

Nature of dilution

When companies do equity dilution, then the issue arises that in what manner the extra shares will be issued to different investors. There are many methods by which the shares are issued. These methods include the allotment on priority basis or through right issue or through public issue. The present shareholders can also again buy the shares under some of these methods while they cannot do so in some other methods because it is already decided in advance that it is for whom (investors). Company has many extra shares after dilution whose distribution is based on the edge. Thus, some financial ratios are affected due to this reason.

Limit of dilution

Equity dilution does not mean that the situation is not good for the present shareholders and the price of shares of the company. If the limit of dilution is low and more number of extra shares are not issued, then this process does not make big impacts. Honestly speaking that if the present shareholders get the shares of the company at lower rates after dilution then the price of shares of the company can increase its secondary market. If the limit of dilution is more, then it's possible that the financial condition of the company do not remain good in the future.

Method of usage

There can be various methods of dilution and every method puts impact on the circumstances on a definite time period. Each circumstance is analyzed in terms of the impact upon it unless it reaches its last destination. Also, if the overall position of the company is strong then this situation could be temporary for the investors where the value of their shares is affected. On the other hand, if the company does the dilution more than its capacity, then it is the clear signal of decline. It is important to understand also because the investors take correct decision on this base.

Article by Nidhi
Nidhi is a freelance content writer with 7+ years experience. She has great passion to write on valuable topics so as to provide accurate information to her readers. She is also keen to provide employment to all Indians and so posts various job openings too in this website.

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