Which of the following best defines stock dilution?

Stock dilution occurs when a company issues additional shares, thereby increasing the total number of shares outstanding. This action reduces the ownership percentage of existing shareholders since their proportional stake in the company diminishes. For instance, if a company that originally has 1,000 shares outstanding issues an additional 500 shares, the existing shareholders now own a smaller percentage of the company than before, despite holding the same number of shares.

The process of dilution is significant for shareholders because it can lead not only to a reduced ownership percentage but also to potential decreases in the value of shares if the new capital raised by issuing additional shares does not enhance the company's overall value or lead to revenue growth. This concept is vital for investors to understand as it directly impacts their control over the company and the value of their investments.