Rights
When a company issues additional shares, existing shareholders face dilution; their ownership percentage shrinks. Rights are the mechanism that protects them.
What Are Rights?
- Rights (also called subscription rights) are short-term privileges issued to existing shareholders
- They allow shareholders to purchase new shares at a subscription price below the current market price
- Purpose: protect shareholders from dilution when a company issues additional shares
- This protection is called a preemptive right - the right to maintain your proportional ownership
Think of it this way: You own 10% of a company. If the company issues new shares and you can't buy any, your 10% shrinks. Rights let you buy enough new shares to keep your 10% intact, and at a discount.
Key Characteristics
| Feature | Detail |
|---|---|
| Who receives them | Existing shareholders only |
| Duration | Short-term, typically 30-45 days |
| Exercise price | Below current market price |
| Tradeable | Yes - they have intrinsic value and trade in the secondary market |
| Effect when exercised | Company issues new shares (dilutive) |
How Rights Work
- Company announces a new stock offering
- Existing shareholders receive rights proportional to their current holdings
- Each right entitles the holder to buy new shares at the subscription price (a discount to market)
- Shareholders can exercise the rights, sell them on the market, or let them expire
Trading terminology:
- Cum rights - stock trades with rights attached (before the ex-rights date)
- Ex-rights - stock trades without rights (rights have been separated)
Exam Tip: Gotchas
Rights have intrinsic value because the subscription price is set BELOW market price. If you don't want to buy more shares, you can sell the rights rather than letting them expire worthless.
- Rights are issued to EXISTING shareholders only; not new investors.
- The subscription price is BELOW market price (unlike warrants, which are typically issued above or at market price).
- Rights expire quickly (30-45 days). Warrants last for years; don't mix them up.
- When exercised, the company issues NEW shares. Shareholders who don't exercise get diluted. Putting It Together:
New share issuance announced → Existing shareholders face dilution → Rights issued → Shareholders exercise or sell → Ownership percentage preserved