What are dilutive securities?

In securities, when a company’s value or earnings per share (EPS) is reduced, that results in a dilutive effect. This can happen during a merger or acquisition when the number of common shares is increased and the target company’s profitability is lower than that of the acquiring company. The extent of the reduction in EPS is directly proportional to the percentage increase in the number of shares.

Examples of dilutive securities include stock options, convertible preferred stocks, convertible bonds and warrants.