1. In
common and
preferred stock, the right of a
shareholder to maintain the same percentage of
ownership in a company, should the company issue more stock. This protects the investor from
devaluation of his/her shares if the company decides to hold a round of
financing. In preferred stock, the anti-dilution clause also indicates the right of a shareholder to purchase more shares in a new round of financing at the
offering price up to his/her previous percentage of ownership. Most U.S. states only recognize the anti-dilution clause if it is made explicit in the corporation's charter.
2. In
convertible securities, the right of a
holder to maintain the same
conversion ratio in the event of a
stock split. For example, if a convertible bond may be exchanged for 100
shares of common stock and there is a 2-for-1 stock split, the same convertible bond can be exchanged for 200 shares. This protects the investor from devaluation of the
conversion option.