Fully Diluted Shares

The total number of shares that would be outstanding if all possible sources of conversion, such as convertible bonds and stock options, were exercised. Companies often release specific financial figures in terms of fully diluted shares outstanding (such as the company’s profits reported on a fully diluted per share basis) to allow investors the ability to properly assess the company's financial situation.




Taobiz explains Fully Diluted Shares
An investor should consider carefully the fully diluted share amount because it can cause a company's share price to plummet significantly if a large number of option holders or convertible bond holders decide to claim their stock.

For example, let's say that XYZ Corp. currently has 1 million shares outstanding, 1 million options outstanding (assuming each option gives the right to buy one share) and its share price is $5. If everyone decides to exercise their options, there would be 2 million shares outstanding and the share price would likely drop to $2.50.