What is dilution?
Dilution means your ownership stake in a company falls in percentage terms. It most often happens when the company issues new shares in a new share issue: the total number of shares rises while your number of shares stays the same, so your slice of the company gets smaller.
A worked example
Say you own 100 shares in a company with 1,000 shares in total — a 10 percent stake. If the company issues 1,000 new shares, there are then 2,000 shares, and your 100 shares now represent 5 percent. Your stake has been diluted, even though you didn't sell a single share.
Dilution isn't necessarily bad
If the new shares are issued at a higher valuation than before, the value of your holding in kronor can rise even though your percentage falls. The capital the company raises can also fund growth that lifts the company's total value. It's the interplay between stake and valuation that matters.
Protection against dilution
In a rights issue, existing owners have the right to subscribe for new shares in proportion to their holding, and can thereby keep their stake. Shareholders' agreements sometimes give early investors specific anti-dilution protection.