Common stock equivalent

A common stock equivalent is a convertible security that is treated as essentially the same as an equity issuance for trading purposes. This treatment only occurs when the market price of the convertible security is trading above the exercise price of the option built into the security. At or above this market price, the security is convertible into common stock; below this market price, one would lose money by converting the security to common stock, so it is not considered a common stock equivalent. Examples of common stock equivalents are:

  • Convertible bonds
  • Convertible preferred stock
  • Options
  • Warrants

A slightly different concept is potentially dilutive securities. This is an accounting term which encompasses the same types of securities. A potentially dilutive security can dilute the holdings of current shareholders, and so is included in the calculation of diluted earnings per share. If a publicly-held company has more types of stock than common stock in its capital structure, it must present both basic earnings per share and diluted earnings per share information in its income statement.