How Do You Spell DILUTED SHARE?
Pronunciation: [da͡ɪlˈuːtɪd ʃˈe͡ə] (IPA) 
Pronunciation: [da͡ɪlˈuːtɪd ʃˈe͡ə] (IPA)
A diluted share is a concept commonly used in finance to refer to a more realistic and comprehensive measure of a company's earnings per share (EPS) by taking into account the potential impact of convertible securities or stock options. To define it more precisely, a diluted share is the hypothetical calculation of EPS that factors in the potential conversion or exercise of these financial instruments that can be converted into common shares.
A company issues convertible securities, such as convertible bonds or preferred stock, which can be converted into common stock based on predetermined terms and conditions. Additionally, stock options granted to employees or executives can also be converted into common shares at a predetermined price. Both these convertible securities and stock options have the potential to increase the outstanding shares if exercised or converted, which can dilute the ownership interests of existing shareholders and affect the calculation of EPS.
When measuring diluted shares, it incorporates the additional shares that would be created from the conversion or exercise of these securities and options. This calculation assumes that they have already been converted into common shares, which reflect their potential dilutive impact. Diluted shares and diluted EPS provide investors and analysts with a more conservative and accurate representation of a company's earnings potential, considering the dilution of ownership interest caused by potential conversions or exercises.
In summary, diluted shares represent the potential impact of convertible securities and stock options on a company's EPS if they were converted or exercised. This measurement allows investors to have a more comprehensive understanding of a company's EPS, acknowledging the potential dilution effect these financial instruments may have on existing shareholders.
The term "diluted share" is not derived from a specific etymology, as it is a combination of two commonly used words in finance and accounting.
The word "diluted" comes from the verb "dilute", which means to make thinner or weaker by adding another substance. In financial context, it refers to the reduction in earnings or ownership per share as a result of the potential issuance of additional shares or securities that can convert into shares.
The word "share" refers to a unit of ownership in a company, typically represented by a stock certificate. It represents a portion of the company's capital and entitles the holder to certain rights and claims.
When combined, "diluted share" refers to the hypothetical scenario where a company's earnings or ownership are adjusted or reduced due to the potential conversion of other financial instruments into shares.
