Stock Rights

Definition

The term stock rights refers to the privilege granted to existing shareholders to receive additional shares of common stock when a new issue is offered to the marketplace.  Generally, a stock right allows the shareholder to receive the additional shares of stock in the same proportion as their existing holdings.

A stock warrant is the document that outlines the rights provided to stockholders, including the number of shares that can be purchased as well as the purchase price.

Explanation

Companies will issue additional shares of common stock into the marketplace to raise capital.  A rights issue provides existing shareholders with the opportunity to maintain their proportional ownership in a company by allowing them to receive additional shares of a new issue of common stock in the same proportion as their existing holdings.  For example, if a new issue of stock increases the number of shares outstanding by 10%, a shareholder holding 100 shares of stock will have the right to purchase 10 shares of the new issue.

A stock warrant is the document that outlines the rights granted to each shareholder.  The information found on the warrant would include the number of shares that can be purchased, the price per share, as well as the date the right expires.  An investor has three options when granted stock rights:

  • Purchase Shares:  the shareholder can elect to exercise their right and buy additional shares of stock.
  • Sell the Rights:  if the warrant price is lower than the current market price per share, the stock rights have value.  When this occurs, the shareholder can sell the stock rights to another investor for profit.
  • Do Nothing:  finally, the shareholder can allow the rights to expire without buying additional shares or selling the rights.

Once the rights issue is announced, a share is not separable from the rights, and the new shares of stock are known as rights-on.  Once the warrant is received, both the shares of stock and the rights can be sold separately.  When a share of stock is sold separately from its rights, it is termed ex-rights.

Related Terms

common stock, employee stock purchase plans, stock compensation plans, stock option plans, stock grants, Section 83(b) election, common stock equivalentcontingent issuance agreement, appreciation and phantom rights, stock warrants