Diluted shares outstanding represents the total number of shares that would be outstanding if all dilutive securities (stock options, restricted stock units, convertible bonds, warrants) were exercised or converted. This gives a more conservative estimate of ownership and per-share metrics. Treasury stock method for options: Assume options are exercised, company uses proceeds to buy back shares at market price — net new shares are added. Example: 100M basic shares, 5M options at $20 strike, stock at $40. Proceeds from exercise = $100M, buys back 2.5M shares at $40, so diluted shares = 100M + 5M − 2.5M = 102.5M. When to use: EPS calculations (always use diluted), DCF equity value (divide by diluted shares), valuation multiples (P/E uses diluted). Anti-dilution: Out-of-the-money options aren't included (not dilutive).