Publicly traded companies can offer either dilutive or anti-dilutive securities. These terms commonly refer to the potential impact of any securities on the stock's earnings per share. The fundamental concern of existing shareholding after new securities are issued, or after securities are converted, is that their ownership interests are diminished as a result.
It isn't just shareholders who are concerned about dilution of EPS through the exercising of securities. Both accountants and financial analysts compute diluted earnings per share as a worst-case scenario when evaluating a company's stock.
Dilutive securities are not common stocks initially. Rather, most dilutive securities provide a mechanism through which the owner of the security can obtain additional common stock. This mechanism can be either an option or conversion. If triggering the mechanism results in a decreased EPS for existing shareholders – by increasing the total amount of outstanding shares – then the instrument is said to be a dilutive security.
Some examples of dilutive securities include convertible preferred stock, convertible debt instruments, warrants and stock options.
Not all security mechanisms result in decreased EPS, and some even increase EPS. If securities are retired, converted or affected through certain corporate activities, and the transaction results in an increased EPS, then the action is considered to be anti-dilutive.
Some security instruments have provisions or ownership rights that allow the owners to purchase additional shares when another security mechanism would otherwise dilute their ownership interests. These are often called antidilution provisions.
Though not a security, the word "antidilution" is sometimes applied to acquisitions of one company by another through the issuing common stock, when the value added through the acquisition offsets the new shares such that total EPS is increased.