Dilutive securities are financial instruments—usually stock options, warrants, convertible bonds—which increase the number of common shares if exercised; this then reduces, or "dilutes", the basic EPS (earnings per share). [1] Thus, only where the diluted EPS is less than the basic EPS is the transaction classified as dilutive. [2] Compare Accretion (finance).
Some examples of dilutive securities are convertible debt, convertible preferred stock, options, warrants, participating securities, two-class common stocks, and contingent shares.[3]
The concept of dilutive securities is often a purely theoretical one, since these instruments will not be converted into common stock unless the price at which they can be purchased will generate a profit. In many cases, the strike prices are set above the market price, so they will not be exercised.[4]
References
- Intermediate Accounting: IFRS Edition John Wiley & Sons, 4 October 2010^
- Intermediate Financial Management Cengage Learning, 24 February 2012^
- Steven M. Bragg. Running a Public Company: From IPO to SEC Reporting John Wiley & Sons, 2009^
- Steven Bragg. The Differences Between Dilutive Securities and Anti-Dilutive Securities Investopedia, 21 November 2018, retrieved 11 December 2019^