Stock market basics: What is a rights issue?

Julie Brownlee, Fsp Invest, 22 Aug. 2014

Tags: rights issue, what is a rights issue, rights issues, why companies use rights issues, stock market,

As a shareholder, there are times when the company you own shares in announces a rights issue.

So what is a rights issue? And why do companies use rights issues?

Let’s take a closer look at the ins and outs of rights issues…

What is a rights issue?

When companies list on a stock exchange, it comes with a number of advantages. One of these advantages is a company can raise money by issuing new shares.

And one way for a company to do this is through a rights issue.

What happens is investors who already own shares in a company get the ‘right’ to buy new shares in the company. This right to buy new shares is in proportion to the number of shares the investor already owns.

For example, if a company announces a two-for-one rights issue, a shareholder has the right to buy two new shares for each share they already own.

How companies offer rights issues to shareholders

To encourage existing shareholders to take up their rights and buy more shares, the rights are usually at a lower price to the current share price of the company.

If a shareholder doesn’t want to take up his rights to buy more shares, he can sell some or all of those rights. The rights have value in themselves.

If a shareholder opts to do this, it’s called selling the rights ‘nil paid’. This is because the shareholder hasn’t paid anything for these rights.

Why a company uses rights issues

Companies that are struggling with debt may use rights issues as a way to pay off their debt. Other companies that may have strong balance sheets may use rights issues to pay for acquisitions.

So there you have it, what a rights issue is.

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