Dilutive securities are a way for companies to increase the number of
outstanding shares, and they can include convertible bonds, preferred
stock, warrants, and stock options. The effect of dilutive security is
that as it increases the number of shares outstanding, it decreases the
“EPS” Earning Per Share. It reduces the company’s value of the
existing stock, but if the company times the execution of dilutive
securities with an increase in revenue, it could possibly leave the
stock value intact or even increase the value. Antidilutive securities
happen when security is retired, converted, or affected by corporate
activities, and this causes an increase in “EPS” Earnings Per Share. “A
corporation with a complex capital structure is required to report
both basic and diluted earnings per share amounts on the face of its
income statement” (Whalen, 2017).
Shareholders usually stay away from stocks that can be diluted
because this decreases their ownership in the company. A company
may need to increase the number of shares due to a lack of funds to
pay for current liabilities and expenses, which is not a good
investment. However, it isn’t always a bad thing to have dilutive
securities; it can be good if a company is looking to raise capital to
expand or boost revenue, which could potentially make the stock
worth more in the long run.
References:
Whalen, J. M., Jones, J. P., & Pagach, D. P. (2017). Intermediate
accounting: Reporting and analysis. Boston, MA: Cengage Learning.
