Fully Diluted Shares
IntermediateFully diluted shares are the total number of a company's shares that would exist if all securities that could be converted into shares, such as stock options, warrants and convertible bonds, were exercised or converted.
A company's basic share count includes only the shares currently issued. But many companies have also issued securities that give holders the right to receive new shares in the future. If these are converted, existing shareholders' ownership would be diluted.
Analysts use the fully diluted share count to calculate value per share more accurately. Using only basic shares would overstate the value of each share.
A common approach for options and warrants is the treasury stock method. It assumes that in-the-money options are exercised and that the company uses the cash received to buy back shares at the current market price. For example, a company has 100 million basic shares and 10 million options with an exercise price of 20, while the share price is 50. Exercising the options brings in 200 million, enough to buy back 4 million shares at 50. The net increase is 6 million shares, giving 106 million fully diluted shares.
Convertible bonds are usually included if converting them would be worthwhile at the current share price. Fully diluted figures are also used to calculate diluted earnings per share.
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