Dilution is the fall in existing shareholders' ownership percentage that happens when a company issues new shares. The same holding now represents a smaller fraction of a larger total share count.
It occurs whenever the share count grows: a rights issue, a share placement, the exercise of employee options or warrants, or the conversion of convertible bonds into equity. Beyond ownership percentage, dilution can lower earnings per share, because the same profit is divided across more shares, and it can soften the weight of each existing vote.
Dilution is the opposite of a share buyback. A buyback removes shares from the market, shrinking the count and lifting each remaining holder's ownership percentage, while dilution adds shares and reduces it. A rights issue is a common cause of dilution, though it offers existing holders the chance to buy the new shares first and so protect their percentage.
You own 10,000 shares in a company that has 100,000 shares in total, so your stake is:
10,000 √∑ 100,000 = 10%
The company then issues 50,000 new shares, lifting the total to 150,000. If you buy none of them, your stake falls to:
10,000 √∑ 150,000 = 6.67%
Your share count has not changed, but your ownership has dropped from 10% to 6.67%.