Dilutive securities are financial instruments—usually
stock options
In finance, an option is a contract which conveys to its owner, the ''holder'', the right, but not the obligation, to buy or sell a specific quantity of an underlying asset or instrument at a specified strike price on or before a specified dat ...
,
warrants,
convertible bonds
In finance, a convertible bond, convertible note, or convertible debt (or a convertible debenture if it has a maturity of greater than 10 years) is a type of bond that the holder can convert into a specified number of shares of common stock in ...
—which increase the number of
common shares if exercised; this then reduces, or "dilutes", the basic EPS (
earnings per share
Earnings per share (EPS) is the monetary value of earnings per outstanding share of common stock for a company during a defined accounting period, period of time, often a year. It is a key measure of corporate profitability, focusing on the inte ...
).
Thus, only where the
diluted EPS is less than the basic EPS is the transaction classified as dilutive.
Compare
Accretion (finance).
Some examples of dilutive securities are
convertible debt
In finance, a convertible bond, convertible note, or convertible debt (or a convertible debenture if it has a maturity of greater than 10 years) is a type of bond that the holder can convert into a specified number of shares of common stock in ...
,
convertible preferred stock,
options,
warrants, participating securities, two-class common stocks, and contingent shares.
The concept of dilutive securities is often a purely theoretical one, since these instruments will not be converted into
common stock
Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently outside of the United States. They are known as equity shares or ordinary shares in the UK and other C ...
unless the price at which they can be purchased will generate a
profit
Profit may refer to:
Business and law
* Profit (accounting), the difference between the purchase price and the costs of bringing to market
* Profit (economics), normal profit and economic profit
* Profit (real property), a nonpossessory inter ...
. In many cases, the strike prices are set above the market price, so they will not be exercised.
References
Corporate finance
Mergers and acquisitions
Embedded options
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