What is Rights Issue of a Share?

Rights Issue

Rights issues are the shares issued by a company only to its existing shareholders which will be cheaper than the current market price of that company share. Sometimes companies come out with a batch of new shares and may choose not go to the public (like IPO). Company may just approach only the existing shareholders (those who own the shares of that company). These shares are called a rights issue. In other words, only the existing shareholders have a right to buy these shares.
Example : If the market price of the share is Rs 200, the company may offer the rights issue shares for Rs 180. So if you are an existing shareholder, you get more shares at a cheaper rate than the market.
 

Will the Share Prices Go Up?

Normally, the price will go up because investors now want to buy the shares so that they can benefit from the rights issue.

Rights Issues are not Free

These shares do not come free like bonus shares. A Bonus share is offered free of cost. They are like a gift (bonus). Rights issue will need you to buy the shares.

How many Rights issue shares will I get?

Rights issue are always offered in proportion to your existing share holding. Company may come out with a 2 for 1 rights issue. Means, it will give the shareholder who has 1 share, the chance to buy 2 additional shares. So, if you have 50 shares, you will get the chance to buy 100 additional shares, at a cheaper price.

What if I don't want  Rights Issue shares?

For a bonus share issue, you are just given the shares free of cost. While in the case of a rights issue, you are given the choice to decline, since you have to pay for it. You have the right to refuse to subscribe to these rights issue.

It Rights Issue Good for me?

Only subscribe to a rights issue only if you really trust in the company’s performance. Don't just buy it because you are getting it cheaper that market price. Try to find out why the company is coming out with a rights issue. If the company needs this to raise money for a sound business plan that will eventually increase the profits and share price, then it is Good.

What are Bonus Shares?