====== Fully Diluted Shares Outstanding (FDSO) ======
Fully Diluted Shares Outstanding (also known as FDSO) represents the total number of a company's shares that would be in circulation if all possible sources of new shares were exercised. Think of it as the "worst-case scenario" for share count. While a company has a certain number of shares trading on the market right now, known as [[Basic Shares Outstanding]], there are often other potential shares lurking in the background. These include executive [[Stock Options]], [[Warrants]], and [[Convertible Bonds]]. FDSO calculates the share count as if every single one of these instruments were converted into common stock today. For a value investor, this number is far more important than the basic share count because it reflects the true potential ownership claim on a company's earnings and assets, preventing nasty surprises down the road.
===== Why It Matters to a Value Investor =====
Imagine you're buying a slice of pizza. You see the pizza has four slices, so you buy one, thinking you own 25% of the pie. But then, three other people show up with "pizza coupons" that they can exchange for a slice at any time. Suddenly, the pizza might have to be cut into seven slices, and your portion is much smaller than you thought. Fully Diluted Shares Outstanding is the investing equivalent of counting not just the existing slices, but also all the valid coupons.
For a [[value investing|value investor]], relying on basic shares is a rookie mistake. It can make a company look cheaper than it really is. Here’s how:
  * **Inflated Earnings Per Share:** Using a lower share count (basic) results in a higher [[Earnings Per Share]] (EPS). This can be misleading.
  * **Deceptive Valuation:** A deceptively high EPS leads to a deceptively low [[P/E Ratio]], making a stock appear to be a bargain when it isn't.
By using FDSO, you are adopting a more conservative and realistic approach. You are calculating your ownership stake and the company's valuation based on the maximum possible number of claims on its future profits. This protects you from the gradual erosion of your ownership stake, a process known as **dilution**.
===== How to Calculate Fully Diluted Shares =====
While companies report both basic and diluted EPS in their financial statements, understanding the mechanics helps you scrutinize their numbers. The general formula is:
**FDSO = Basic Shares Outstanding + Shares from Dilutive Securities**
The tricky part is calculating the "Shares from Dilutive Securities," which depends on the type of security.
==== Stock Options and Warrants ====
For options and warrants, we use the [[Treasury Stock Method]]. This method assumes the company uses the cash it receives from employees exercising their options to buy back its own stock from the market. Only [[in-the-money]] options (where the market price is higher than the exercise price) are included.
The net new shares are calculated as follows:
  1. **Calculate Proceeds:** Number of Options x Exercise Price per Option
  2. **Calculate Shares Repurchased:** Proceeds / Average Stock Price
  3. **Find Dilutive Shares:** New Shares Issued from Options - Shares Repurchased
==== Convertible Securities ====
For convertible preferred stock and convertible bonds, the calculation is more direct. We use the [[if-converted method]], which simply assumes the securities are converted into common stock as per their terms. For example, if a company has 1,000 convertible bonds that can each be converted into 50 shares of stock, you would add 50,000 (1,000 x 50) shares to the basic share count.
===== A Practical Example =====
Let's look at a hypothetical company, **Widget Corp**, to see the impact of dilution.
Widget Corp. has:
  * Basic Shares Outstanding: 20,000,000
  * [[Net Income]]: $50,000,000
  * Employee Stock Options: 2,000,000 options with an exercise price of $30
  * Average stock price for the period: $50
First, let's calculate the **Basic EPS**:
  * $50,000,000 / 20,000,000 shares = **$2.50 per share**
Now, let's find the FDSO using the Treasury Stock Method for the options.
  1. **Proceeds from options:** 2,000,000 options x $30 = $60,000,000
  2. **Shares repurchased with proceeds:** $60,000,000 / $50 = 1,200,000 shares
  3. **Net dilutive shares:** 2,000,000 new shares - 1,200,000 repurchased shares = 800,000 shares
  4. **Fully Diluted Shares Outstanding:** 20,000,000 (basic) + 800,000 (from options) = 20,800,000 shares
Finally, let's calculate the [[Diluted EPS]]:
  * $50,000,000 / 20,800,000 shares = **$2.40 per share**
As you can see, the Diluted EPS is about 4% lower than the Basic EPS. While this may seem small, it gives you a much truer picture of the company's profitability per share. For a disciplined investor, that small difference is the margin of safety that separates a good investment from a bad one. Always check the fine print and use the fully diluted number.