DEFINITION of 'Residual Security'

A convertible security which may increase the number of current outstanding common shares. A residual security, which is converted or exercised, results in more shares being issued, causing dilution. Corporations may offer residual securities to attract investment capital when competition for funds is highly competitive.

BREAKING DOWN 'Residual Security'

If the residual securities are converted or exercised it will affect financial analysis metrics, such as earnings per share, because the new calculation would require dividing a company's earnings by a greater number of shares. A convertible bond, for example, would be a residual security because it allows the bond holder to convert the security into common shares. Preferred stock may also have a convertible feature.

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