What is dividend rights issue?
A dividend rights issue is when a public company sells new shares in return for cash. Shares are usually offered at a discount price within a set time frame to encourage existing shareholders to take up the rights. They have first refusal for the shares.
Key takeaways
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A dividend rights issue occurs when public companies sell new shares for cash at discounted prices to existing shareholders who have first refusal.
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Companies use rights issues to raise capital for paying off debt, buying equipment, or acquisitions, exemplified by Petrobras raising almost $70bn in 2010.
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Shareholders can subscribe to additional shares, sell their rights in the open market, or receive notification from their broker about available options.
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Ignoring a rights issue will weaken your shareholding and diminish future dividend payments due to dilution from newly issued shares.
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Before purchasing discounted shares through a rights issue, it's important to research and understand the company's reason for raising capital.
Where have you heard about dividend rights issue?
A dividend rights issue is an example of a corporate action. Companies typically offer more shares to raise extra capital. This could be for a number of reasons, such as to pay off debt, buy new equipment or acquire another company. In 2010, Brazilian oil company Petrobras raised almost $70bn in what was at the time, the largest ever rights issue.
What you need to know about dividend rights issue.
You’ll be notified by a broker if you have the option to subscribe for extra shares. If you don't want more shares, you can sell your rights in the open market.
Ignoring a rights issue isn't recommended, as your shareholding in the company will weaken due to extra shares being issued and you'll be diminishing future dividend payments.
Buying discounted shares is a tempting prospect, but it’s important to find out the reason for the rights issue before taking the plunge and purchasing more stock.