Rights Issue
A rights issue lets existing shareholders buy new shares, usually at a discount, in proportion to what they already own. Taking up the rights avoids dilution; shareholders who do not can often sell the rights instead.
A rights issue is how a listed company raises new money from its existing shareholders first, usually at a discount. Shareholders can take up their rights, sell them, or do nothing and be diluted. Company law and listing rules differ by country.
- Category
- Fundamentals and Macroeconomics
- Reading time
- 3 min
- Also called
- Rights offering, Rights offer, Pre-emptive offer
- Updated
Rights issues in plain words
A rights issue gives existing shareholders the chance to buy extra shares, usually at a discount to the market price.1
Exchanges flag it as an invitation from the company for current holders to buy more shares.2
Shareholders who don't take up their rights usually end up with a smaller slice of the company.1
What to do when a rights issue is announced
Read the terms
Note the ratio, price and deadline of the issuance that allows shareholders to purchase additional shares.1
Compute the theoretical price
Blend the old price and the discounted new price.
Consider taking up
Buying protects your stake from being diluted by the offering.1
Consider selling rights
If you don't want to buy, check whether your rights can be sold on the market.1
Check the offer type
Some offers cannot trade in nil paid form, so rights may not be sellable.2
Assess the reason
Raising money for growth differs from raising it to repair a balance sheet.
Worked examples
Example 1 — Theoretical price
TERP $9.20A hypothetical company trades at $10 and offers 1 new share for every 4 at $6.
| 4 old shares | $40 |
| 1 new share | $6 |
| TERP | $9.20 |
New shares come usually at a discount to market price, so the blended price falls to $9.20.1
Example 2 — Ignoring rights
DilutedA hypothetical holder owns 1% and does nothing in a 1-for-4 issue.
| Old stake | 1% |
| New stake | 0.8% |
By not taking up the rights, the shareholder's stake was diluted.1
Example 3 — Selling rights
Value capturedA hypothetical holder sells rights worth $0.80 each instead of buying.
| Rights sold | 100 |
| Cash | $80 |
The rights were tradeable, so the holder sold them to investors who wanted to use them.1
Rights issue vs placing
| Aspect | Rights issue | Placing |
|---|---|---|
| Who can buy | Existing shareholders first | Selected investors |
| Dilution | Avoidable by taking up | Unavoidable for others |
| Speed | Slower | Faster |
| Typical discount | Often larger | Usually smaller |
Why companies use rights issues
Debt reduction
Cut Leverage with fresh equity.
Funding growth
Pay for acquisitions or projects.
Crisis repair
Shore up capital in a Bear Market or Recession.
Fair treatment
Lets holders keep their share, unlike a new Initial Public Offering of stock.
Advantages and disadvantages
Advantages
- Existing holders can avoid dilution.
- Rights can often be sold for value.
- Treats shareholders equally.
- Can raise large sums.
Disadvantages
- Requires shareholders to invest more or be diluted.
- Often signals financial stress.
- Share price usually falls.
- Rules differ by country and can be complex.
Going deeper
Read as far as you need. Each level builds on the one before it.
Common mistakes
Ignoring the deadline
Unexercised rights may lapse.
Thinking the discount is free money
The share price adjusts.
Assuming rights can always be sold
Some offers are not tradable.
Ignoring why money is raised
The purpose matters.
Check your understanding
Test yourself before moving on. Each answer comes with an explanation.
Key points to remember
- A rights issue offers new shares to existing holders.
- Shares are usually offered at a discount.
- Ignoring rights dilutes your stake.
- Rights can often be sold.
- Rules differ by country.
Frequently asked questions
Do I have to take up my rights?
Why is the price discounted?
Is a rights issue bad news?
Further learning
- Earnings per Share
How new shares dilute EPS.
- Initial Public Offering
Another way to issue shares.
- Leverage
Why firms raise equity.
- Stock Split and Reverse Split
A share change that raises no money.
Sources
This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.
- Nasdaq. Rights offering Definition (opens in a new tab) Checked .
- London Stock Exchange. Special Conditions Guide (opens in a new tab) Checked .
Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. We are not affiliated with any publisher linked above. Last reviewed . Report an error or request a source credit.