How would one go about Diluting stock in company and what are the most common situations where dilution occurs?
Companies and especially startups issue new stock all the time. Add a co-founder? Issue 1,000,000 new shares. Hire an employee? Give them 20,000 stock options (that will eventually turn into stock).
Each time the company creates new shares, whatever number of shares you own gets diluted, because as a percentage, you own less of the total.
Sometimes, dilution can be used to wipe-out previous investors or founders. It works by issuing a huge number of shares. Imagine so far the company had 10M shares, with grumpy Joe the old co-founder who everyone hates. Simply issue 100M shares (ten times more), now Joe's share is divided by 10 and becomes insignificant. Split those 100M shares with the team you want to keep, and bingo, you just kicked Joe out (watch for lawsuits though).
First, read this: http://www.investopedia.com/terms/d/dilution.asp#axzz1Yj4pchYC
Dilution can can happen from employee stock option exercise, by offering additional shares into the market (to raise money trough an equity issuance), as well as other ways (convertible debt, etc.).