Rights Issue

A rights issue is a way for a company to raise new money by offering its existing shareholders the chance to buy additional shares directly from the company, usually at a discount to the current market price. Instead of selling new shares to the public at large, the company gives current owners first refusal, roughly in proportion to how much they already own.

Here's how it works in practice: if you own shares in a company, you might receive "rights" that let you buy, say, one new share for every five you already hold, at a set price, within a limited window of time, often a few weeks. If you use the rights, you pay the subscription price and receive new shares. If you don't want to participate, you can often sell the rights themselves on the market to another investor, since the rights have value whenever the subscription price is below the current share price.

The nuance that trips people up is what happens to the stock price and to shareholders who do nothing. Because a rights issue creates new shares, usually at a discount, the stock typically drops on the announcement or on the "ex-rights" date to reflect the larger number of shares outstanding, similar to how a stock split changes the price without changing total company value. Shareholders who ignore the rights and let them expire worthless don't lose their existing shares, but their percentage ownership gets diluted as new shares enter circulation, and if they held onto tradeable rights without selling or exercising them, they've left money on the table.

Rights issues are distinct from stock dividends or stock splits because shareholders must actively pay money to receive the new shares; nothing is handed out for free. Companies typically use them when they need capital but want to avoid diluting control that could come from selling to new outside investors, or when market conditions make a straightforward public offering less attractive.