Dictionary of Finance and Investment Terms: residual security
residual security
- security that has a potentially dilutive effect on earnings per common share. Warrants, rights, convertible bonds, and preferred stock are potentially dilutive because exercising or converting them into common stock would increase the number of common shares competing for the same earnings, and earnings per share would be reduced. See also dilution: Fully Diluted Earnings Per (Common) Share.
- the term residual is also used informally to describe investments based on the excess cash flow generated by collateral pools. CMO REITs and the bottom tier of most Collateralized Bond Obligations (CBO) are examples of "residuals."
