A rights issue is a way by which a listed company generally raising additional capital instead of going to the public, the company gives its existing shareholders the right to subscribe newly issued shares in proportion to their existing holdings.
1:10 rights issue means an existing investor can buy one extra share for every ten shares already held by him/her.
- Every new issue has some kind of diluting effect. As a result, there is a fall in the market price in proportion to an increase in the number of shares. The market capitalisation remains unaffected.
- If the Investor believes that the funds raised for an extremely positive purpose then price of the stock may rise. As a result, there is an increment in the market capitalisation.
- If the share price has fallen below the subscription price. It may be cheaper to buy the shares in the open market. Investors can just let the rights issue lapse.
If a shareholder does not want to exercise the right to buy additional shares then he/she can sell the right as the rights are usually tradable.