Dilution in finance refers to the reduction in the ownership percentage of existing shareholders when a company issues additional shares. While dilution is often seen as a negative factor due to its impact on earnings per share (EPS) and voting power, it is sometimes necessary for a company's growth and sustainability.

One primary reason for dilution is capital raising. Companies issue new shares to generate funds for expansion, research, acquisitions, or debt repayment. This allows businesses to scale operations without relying entirely on loans, reducing financial risk.

Dilution is also essential in employee compensation. Stock-based compensation, like stock options and restricted stock units, helps attract and retain talent. While this increases the number of shares, it aligns employee interests with the company’s long-term success.

Dilution occurs when a company issues new shares to finance a merger or acquisition deal. This helps companies grow strategically without large cash outflows.

Despite the downsides, dilution can create long-term value if the capital raised leads to higher growth and profitability. Investors should carefully analyze the purpose and impact of dilution before making investment decisions. As a result, dilution is a double-edged sword—essential for growth but requiring careful management.