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In the context of company stock, this is the effect that stock grants (options, restricted stock/RSUs, SARs, performance shares) have or will have on the other shareholders of a company. Each time an option is granted, for example, an existing shareholder's ownership interest in the company is potentially reduced. This reduction can occur because more shares are used in the calculation of earnings per share. For details, see the FAQ on dilution elsewhere on this website.
Dilution can also refer to economic-value dilution. This method uses a pricing model to place an economic value on the stock grants and then expresses this value as a percentage of the company's market capitalization. See also the entries on overhang and run rate.
To determine "net annual dilution" (which you may see in annual proxy statements by your company), companies calculate the number of shares granted under equity awards, after subtracting forfeitures.
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