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Covered warrants and exchange-traded or OTC options do not result in dilution of the interest of common shareholders because the shares underlying these instruments are outstanding shares: no new shares need be issued upon their exercise or settlement. Warrants issued by a corporation as part of its capitalization can dilute the interest of prior shareholders. The best way to estimate this dilution is to divide the market value of the warrants by the market value of the corporation's common shareholders' equity plus the market value of other convertible securities-in the simplest case, the market value of the warrants. The resulting fraction expressed as a percent will give a good measure of the dilution attributable to the warrants. If a warrant will dilute the interest of the shareholders, the value of the warrant itself is reduced. See Dilution.
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