In the context of equity offerings, what does ‘dilution’ refer to?

Dilution in the context of equity offerings refers specifically to an increase in the number of shares outstanding. When a company issues additional shares, it increases the total number of shares that are held by shareholders. This increase can lead to a reduction in each existing shareholder's proportional ownership in the company, as their percentage of ownership is spread over a larger total number of shares. Consequently, existing shareholders may find that their voting power and potential claim on future earnings are decreased, which is the essence of dilution.

This concept is particularly important for investors to understand because when new shares are issued, existing shareholders' earnings per share (EPS) can also decline, assuming the company does not generate correspondingly higher earnings with the new capital raised. The impact of dilution is often a significant consideration for current investors when evaluating potential equity offerings.

Thus, dilution primarily relates to the increase in shares outstanding, which directly affects ownership percentages and can influence investor perceptions of value.