Hi @stridge28! Thanks for using the Achievable forum!
Convertible securities are definitely a difficult topic to conceptualize. Let’s see if I can help you understand it a bit better by talking through a hypothetical example.
Assume ABC Company has 10 shares of stock outstanding, and you own 1 of those shares. Your one share is equivalent to 10% of the company; in plain terms, you basically own 10% of the company. Your vote is worth 10% when an item requires shareholder approval. You will obtain 10% of the dividends paid to investors if the BOD (board of directors) declares a dividend. And so on.
Let’s say ABC Company gains majority shareholder approval to issue a convertible bond. You heard it would be dilutive, but you still voted for it as issuance of a convertible bond resulted in a lower interest rate for the bond, meaning the company can borrow money for less. As a shareholder, you’re invested in the company’s success. Let’s also say they issue one convertible bond that’s convertible into 10 new shares of common stock.
A few years later, the bond is converted, resulting in 10 new shares of common stock being issued to that bondholder. This one conversion changed the outstanding shares from their original 10, to now 20. You still own 1 share of ABC Company stock, but now you own 1 of 20 outstanding shares, or 5% of the company. 5% ownership means you’ll only have control over 5% of the vote, and only receive 5% of the dividends paid.
That’s dilution. The number of shares owned didn’t change, but the power of those shares did. Conversion results in additional shares being created, and that “dilutes” the value of any shares held by investors.
I hope this helps! DM me or respond to this thread if you have additional questions.