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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 an underlying asset or financial instrument, instrument at a specified strike price on or before a specified expir ...
, warrants, convertible bonds—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 Earnings are the net benefits of a corporation A corporation is an organization—usually a group of people or a company—authorized by the State (polity), state to act as a sing ...

earnings per share
). Thus, only where the diluted EPS is less than the basic EPS is the transaction classified as dilutive. Compare
Accretion (finance) In finance, the term accretion refers to a positive change in value following a Financial transaction, transaction; it is applied in several contexts. When trading in bond (finance), bonds, accretion is the capital gain expected when a bond is bou ...
. Some examples of dilutive securities are
convertible debt In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availab ...
,
convertible preferred stock A convertible or cabriolet () is a Car, passenger car that can be driven with or without a roof in place. The methods of retracting and storing the roof vary between models. A convertible allows an open-air driving experience, with the ability ...
, 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 Equity may refer to: Finance, accounting and ownership *Equity (finance), ownership of assets that have liabilities attached to them ** Stock, equity based on original contributions of cash or other v ...
unless the price at which they can be purchased will generate a
profit Profit may refer to: Business and law * Profit (accounting) Profit, in accounting Accounting or Accountancy is the measurement, processing, and communication of financial and non financial information about economic entity, economic ...
. 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 {{business-term-stub