Rights issue

A rights issue is one of the ways in which listed companies raise new money via the stock market. It gives investors who already hold shares in the company the right – but not the obligation – to buy additional shares in a fixed proportion to their existing holding. The new shares are usually priced at a discount to the current market value of the company’s shares in order to encourage investors to take up the offer.

As the new shares come directly from the company, they are free of both stamp duty and brokers commission. Shareholders who do not want to take up their rights to buy the discounted shares may sell them as ‘nil paid rights’ – either back to the company, which will then pay them the difference between the discounted sale price and the market price on the issue day, or through their broker.

The discount on new shares bought at a rights issue does not necessarily mean that they are cheap, as the new shares will ‘dilute’ the old: the market price of existing shares will fall to reflect the lower price of the new, so a large part of the ‘gain’ on the new shares will be cancelled out.

MoneyWeek magazine

Latest issue:

Magazine cover
Walking out on the banks

The UK's best-selling financial magazine. Take a FREE trial today.
Claim 3 FREE Issues
Shale gas 'fracking' promises to transform Britain's energy market. Find out what it is, what it means, and how to invest.

More from MoneyWeek

The problem with the Bank of England

Fracking: Nine reasons not to get carried away

Five small-cap stocks worth a flutter

This Dutch company could help us tame floods

ScreenHunter_01 Mar. 25 09.51

The latest investment opportunities & how you can profit - sign up to our FREE daily email HERE