Category: 

What is a Rights Issue?

Article Details
  • Written By: Mary McMahon
  • Edited By: Kristen Osborne
  • Last Modified Date: 03 February 2020
  • Copyright Protected:
    2003-2020
    Conjecture Corporation
  • Print this Article

A rights issue is a one-time offering of shares in a company to existing shareholders, allowing them an opportunity to maintain their proportional ownership in the company when a new offering of shares is made. The rights issue typically expires within a set period of time, and if people do not exercise their rights, they lose them. The rights can be transferred, allowing people to sell them on the open market if they do not intend to use them. Once exercised, rights cannot be used again; a shareholder cannot, for example, buy shares at the special price and then sell the rights to allow someone else to make a purchase at that price.

In a rights issue, shareholders are offered a number of shares in proportion to the shares they already hold, at a discounted price. They can buy shares before they are released on the open market, and since new issues often cause stock prices to rise when they are timed right, taking advantage of a rights issue can be very profitable for existing shareholders, as they can turn around and sell the shares they buy at a profit later. The company determines the number of shares to offer each shareholder by reviewing their fractional ownership before the new issue is made.

Ad

People who choose to sell their rights must do so before they expire, and the purchaser is required to exercise them within the expiration period. If people purchase rights in a rights issue and fail to act on them, they will not be able to buy shares at the special discounted price later. The person making the sale will end up with a diluted share of the company once the new issue is fully sold, but they may be deemed acceptable.

Companies price rights issues carefully. Existing shareholders can create a built-in market for a new issue, as some may want to keep their fractional share of the company the same and many will want to take advantage of a special price on new shares. Companies don't want to price a rights issue too low, as they will miss out on raising capital, but they also don't want to price it so high that existing shareholders can get a better deal buying on the open market.

People with shares of stock in a company should make sure their address and other contact information is current. When shares are transferred or sold, the information with the company should be updated so the new shareholders can exercise their rights.

Ad

Recommended

Discuss this Article

Post your comments

Post Anonymously

Login

username
password
forgot password?

Register

username
password
confirm
email