How do you calculate fully diluted shares?

To calculate fully diluted shares, it's essential to understand the concept of dilution and how different classes of securities can affect the total number of shares outstanding. The correct approach involves taking basic shares and adding the dilutive impact of options, warrants, convertible securities, and other potentially dilutive financial instruments.

Using this method captures all potential shares that could be issued due to the exercise of options or conversion of convertible securities, which is crucial for evaluating a company's total share count on a fully diluted basis. This figure is especially important for investors as it provides a clearer picture of ownership dilution and the company's valuation from a shareholder's perspective.

In contrast, the other methods focus on narrower calculations that do not encompass the full range of dilutive securities. For example, some options only consider common shares or limit the calculation to just one type of dilutive security, thereby ignoring other potentially significant sources of dilution. Hence, by adding up the basic shares with the effects of all dilutive instruments, you achieve a fully diluted share count that comprehensively reflects the potential equity stake of all shareholders.