Ex-Rights

What Is Ex-Rights?

The term ex-rights refers to shares of stock that are trading but no longer have rights attached to them. Rights, in this context, refer to the opportunity to purchase more shares of a new issue or offering at a given price.

Shares of stock that confer such rights are considered to have an additional value based on the opportunity represented by those rights.

Understanding Ex-Rights

Shares trading ex-rights have either passed the expiration of the rights offering period, been transferred to another party (thus making the rights no longer possible to trade), or already exercised by the original holder. In any of these circumstances, the shares no longer provide the holder any special privileges.

Rights Offerings

Sometimes, shareholders are invited to participate in rights offerings, which typically allow them to purchase more shares of stock at a discounted price. In determining who receives those rights, companies set a date for the distribution of rights to current shareholders. Once that decision has been made, and indicated shareholders are eligible to receive the identified rights, the stock is said to trade ex-rights. Following that point, a shareholder is entitled only to the shares they purchase, but not to the rights that might otherwise come with them.

Rights offerings, also called rights issues, are a tactic companies use to raise capital. Companies will use the proceeds from rights issues to pay down debt, acquire another company, or some other purpose.

Rights offerings are structured to circumvent shareholders from having their interest diluted against their will. Distribution is proportional to an investor's percentage of total holdings; for example, if someone owned one percent of the outstanding shares of the company, that investor would get rights equal to one percent of the total new shares offered by the company.

Ex-Rights vs. Cum Rights

Ex-rights shares are worth less than shares that are still trading cum rights (not yet ex-rights) because they do not give a shareholder access to a rights offering. Renounceable rights may trade separately, allowing shareholders to choose to sell their rights rather than exercise them.

Rights have their own value that is traded with shares before they are ex-rights; investors can buy and sell rights between the time they're issued and the final exercise date, set under the rights offering. Therefore, stocks that trade with rights are more valuable than if they trade ex-rights.

Being able to exercise the rights and buy shares at a discount gives the rights holder an immediate gain in value. Selling the rights essentially equates to free money for the shareholder.

Calculation of a Theoretical Ex-Rights Price

A simple way to estimate the theoretical ex-rights price is to add the current market value of all shares existing before the rights issue and the funds raised as a result of the rights issue sales. This number is then divided by the total number of shares in existence after the rights issue is complete to arrive at a per-share value of those rights.