Dilutive Security

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A dilutive security is any type of investment security that has the potential to increase the number of common shares outstanding. In other words, it’s any securities that can be turned into common stock. The idea is that if a security increases the outstanding shares it will dilute the current shareholders stake in the company as well as their owner benefits like future dividends and voting power. Unless the existing shareholders have the right to maintain their ownership when dilutive securities are converted, their stock will become slightly less valuable.

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Like most investments, dilutive securities can take a few different forms. Common stock is obviously the most common dilutive security because any additional issuances of common stock will automatically raise the number of outstanding shares.

Beyond that, some other examples include convertible preferred shares, stock options, rights to buy, and convertible bonds. Read more...