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.