Dilutive securities are 'hybrid securities' that have both debt and equity characteristics. They combine:
(1) an unconditional receivable/payable (the debt attribute) with
(2) a financial option contract that, if exercised, enables the holder to obtain an equity interest in the issuing firm.
Example:
The stock warrants can be used to purchase the issuing company's stock at a fixed price.
These compound financial instruments are called dilutive securities because if the option is exercised, additional common stock is issued and this causes a decrease, or dilution in earnings per share.