What Is A Rights Issue?

moneyA rights issue gives shareholders the right to buy more shares within a set time at a fixed price in proportion to their existing shareholding.

So, a two-for-one rights issue would give shareholders the right to buy two new shares for every share they already own. A one-for-two rights issue, on the other hand, would let shareholders buy one new share for every two that they already own. Generally, the new shares are priced at a discount to encourage shareholders to take up the rights.

Rights issues come in two distinct flavours: renounceable and non-renounceable. With a renounceable rights issue, shareholders can sell their rights on the market to someone else. But in the case of a non-renounceable rights issue, they can’t.

There are two things that you can do with a non-renounceable rights issue. You many take either up the rights to maintain your stake holding in the company or ignore it by allowing the rights to expire. If you don’t take up the rights, your stake in the company will be diluted.

With you a renounceable rights issue you have a couple of extra choices apart from taking up and ignoring the rights. You may transfer your rights to someone else by selling it. Interestingly, you may decide to sell a portion of your rights to raise just enough cash to take up the rights that you have kept. This is known as swallowing your tail.

The Motley Fool’s purpose is to help the world invest, better. Click here now  for your FREE subscription to Take Stock — Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock — Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.

Like us on Facebook to keep up-to-date with our latest news and articles. The Motley Fool’s purpose is to help the world invest, better.  

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.