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What is dilution in the context of company valuation?

An example of an AI chatbot conversation about dilution and its impact on company valuation.

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You

What is dilution in the context of company valuation?

MagicBuddy
MagicBuddy

Dilution refers to the reduction in ownership percentage of existing shareholders when a company issues new shares. It can affect the valuation of the company.

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You

How does dilution impact my shares if I own 10% of a company?

MagicBuddy
MagicBuddy

If the company issues more shares, your 10% ownership could decrease if you don't buy additional shares. This means your voting power and claim on profits may also reduce.

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You

Can you give an example of how dilution works?

MagicBuddy
MagicBuddy

Sure! If a company has 1,000 shares and you own 100 shares (10%), and it issues 500 new shares, the total shares become 1,500. Your ownership drops to about 6.67% unless you buy more shares.

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You

What are the different types of dilution?

MagicBuddy
MagicBuddy

There are several types, including equity dilution from issuing new shares, convertible securities, and employee stock options. Each can affect existing shareholders differently.

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