Dilutive is the effect of a transaction that reduces earnings per share or the ownership interest of an investor. This concept occurs when a business issues shares, convertible debt, options, or warrants. In these situations, either shares are issued at once or may be issued at a later date at the option of the instrument holder. When the number of shares or potential shares expands in this manner, the effects are:
Earnings per share. The earnings reported by the issuing entity are divided by the increased number of shares or potential shares, which reduces the amount of earnings per share.
Ownership interests. The relative proportion of shares held by each existing shareholder declines or may decline, since there may now be a larger pool of shares outstanding.