What is a subscription right?
When a company decides to raise capital with new money, it offers new shares at a price called the subscription price. Existing holders get priority in proportion to what they hold, say one new share for every two. The notice gives the subscription price, the last session in which buying the share still carries the right, and when subscription opens and closes.
A worked example
Why does the price fall? Because some shares came in cheaper. The result is a theoretical price of about 14. The theoretical value of one right is the gap between the price before the right is detached and the theoretical price after: 16 − 14 = 2. Since you need two rights to subscribe for one new share, the two rights together are worth about 4, the same as the gap between the theoretical 14 and the subscription price of 10. After that the market can move away from this figure in either direction.
Three choices
See the rights now trading
Open the rights page and compare each right's market price with its theoretical value: the price before the right is detached minus the theoretical price after, allowing for the subscription ratio.
Check yourself
1. You hold 300 shares; the offer is one new share for every 3 at EGP 5. What does subscribing cost?
2. You neither subscribed nor sold the right before the window closed. What happened?
Summary
- A subscription right gives existing holders priority on new shares at a set price.
- The price adjusts because shares come in cheaper, and that is what gives the right its value.
- You can subscribe or sell the right; let it lapse and its value is gone.