Dilutive security

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]