A company can change what your customer owns without the customer placing an order. It can offer new shares, split the old ones, pay a dividend or invite holders to sell. Each of those events carries a price, a deadline and a rule about who qualifies.
When a corporation decides to sell new shares, every existing owner's slice of the company shrinks. Suppose your customer owns 100,000 of a company's 1,000,000 shares, or 10%. If the company sells 250,000 new shares to outsiders, the customer's stake falls to 100,000 ÷ 1,250,000 = 8%. That shrinking slice is dilution.
A preemptive right lets an existing shareholder buy new shares before the public can, in proportion to current holdings. Your customer keeps 10% of the company by buying 10% of the new issue. Shareholders have preemptive rights only if the corporate charter or governing state law grants them. Under Regulation S-K, a Securities and Exchange Commission (SEC) disclosure rule, the issuer must disclose whether these rights exist.
Common mistakes
- Wrong rights formula: Take an ex-rights price of $33, a $25 subscription price and 4 rights. Dividing by 5 gives $1.60 instead of the correct $2. Compare the trade date with the registration statement's effective date before you choose a denominator.
- The T+2 ex-date: Older materials put the ordinary ex-date one business day before the record date. Under the rules current as of 2026-10-22, the ex-date is the record date itself.
- Record-date rule for big distributions: A 2-for-1 split or a 30% stock dividend goes ex the first business day after the payable date. A 10% stock dividend follows the record-date rule.
Bottom line
- Rights come one right per share owned, carry a subscription price below market and last a short window; holders exercise, sell or let them lapse.
- One right is worth (M − S) ÷ (N + 1) cum rights and (M − S) ÷ N ex rights; the stock goes ex-rights the first business day after the registration statement is effective.
- Warrants are long-term, priced above market at issue, often a sweetener on bonds or preferred, and carry no dividends or votes until exercised.
- Splits and stock dividends change share count, price and cost per share but never total value or ownership percentage; anti-dilution provisions adjust warrants and convertibles by the same ratio.
Exam shortcut
In a rights question, settle the trading status before you touch the numbers. If the date is before the ex-rights date, or the stem says "cum rights," add 1 to the denominator. After the ex-rights date, don't. In an ex-date question, first ask whether the distribution is 25% or more. If yes, the ex-date is the day after payable.
The full lesson (about 4,918 words, 33 min read) adds 2 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- C14
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