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

  1. ^ Donald E. Kieso; Jerry J. Weygandt; Terry D. Warfield (4 October 2010). Intermediate Accounting: IFRS Edition. John Wiley & Sons. p. 822. ISBN 978-0-470-61631-4.
  2. ^ Eugene F. Brigham; Phillip R. Daves (24 February 2012). Intermediate Financial Management. Cengage Learning. pp. 781–. ISBN 978-1-111-53026-6.
  3. ^ Bragg, Steven M. (2009). Running a Public Company: From IPO to SEC Reporting. Hoboken, NJ: John Wiley & Sons. p. 232. ISBN 978-0-470-52728-3.
  4. ^ Bragg, Steven (21 November 2018). "The Differences Between Dilutive Securities and Anti-Dilutive Securities". Investopedia. Archived from the original on 2014-11-01. Retrieved 11 December 2019.
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