Definition
If a company issues new shares, the same earnings are split across more shares, so earnings per share fall unless earnings grow too. Dilution comes from stock offerings, convertible debt, stock options and employee compensation.
How it is used
A steadily rising share count over several years is a common red flag. Falling share counts, through buybacks, work the other way.
Example
Hypothetical exampleYou own 1 million shares of a company with 100 million shares, a 1% stake. If it issues 25 million more, you still own 1 million shares but only 0.8% of the company.