Dilutive securities are instruments that increase the number of a
companies shares outstanding. This has an effect of lowering
earnings per share and also lower each shareholders ownership stake
unless they purchase more securities after the dilution. Anti-dilutive
securities work in the opposite manner and may initially seem like a
positive gain for shareholders.
a As a shareholder, it maybe wise to calculate a worst case scenario of
diluted earnings per share ( investopedia). Generally the basic ratio of
earnings per share is front and center when assessing the health or
attractiveness of investing in a publicly traded company. But a
shareholder or investor must ask themselves if they are in it for the
long haul or looking to make a short term gain. What is a
shareholder's risk tolerance and how important is their vote?
For shareholders that are looking for shorter term gains then the
effects dilution is a risk to take into consideration. I know that I am
more of a longer term investor. I buy stocks on a monthly basis with
zero ambitions of any immediate gains. I understand that when
investing in startups that the company will face both supply chain and
logistics issues as well as the need to attract and retain talented
employees/staff. Many companies will offer staff members
convertible preferred shares and stock options. That plus any other
features of having a complex capital structure mean that my
ownership stake could be diluted but I am not the type of shareholder
who is fully interested in voting and influencing the companies
decisions, I am more in search of long term gains. Think about buying
stock in google when they went public in 2004 and what that would
be worth today. $10,000 then would be worth 300k today but with
less voting power. a That gain would not have been realized a if an
investor reacted poorly to all the stock splits and share dilution that
took place in between.
Whalen, J. M., Jones, J. P., & Pagach, D. P. (2017). Intermediate
accounting: Reporting and analysis. Boston, MA: Cengage Learning.
https://www.investopedia.com/ask/answers/102714/what-are-
differences-between-dilutive-securities-and-antidilutive-
securities.asp
