Rights issue definition
A rights issue is a way for a company to raise cash by inviting its shareholders to buy new shares at a discounted price for a defined period. Invited shareholders are not obliged to purchase the shares but have the right to do so. Rights issues are often issued by a company to pay down debt or quickly raise capital for increased investment.
How do rights issues dilute share prices?
Right issues can dilute share prices because an increase of stocks on the marketplace means that the company's net profit is spread over more shares, resulting in a smaller share price than before the rights issue.
A share price that has been adjusted following a rights issue is called an ex-rights price.
For example, a shareholder who owns five shares valued at $100 each receives a rights issue to purchase an additional five shares at $60 each. If the right is exercised, the shares will now have a value of $80 rather than $100.
500 +300 = 800/10 = 80
However, the shareholder will still have an increased total value of shares, and they also have the right to trade the shares on the market until the expiry date.