Ex-Rights

Ex-rights are shares of stock that are trading but no longer have rights attached to them because they have either expired, been transferred to another investor or been exercised. The rights originally assigned to the stockholder are, for whatever reason, no longer valid or no longer applicable to the stock.

Ex-rights shares are worth less than shares which are not yet ex-rights; ex-rights shares 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.

Sometimes, shareholders are invited to participate in rights offerings, which typically allow them to purchase more shares of stock at discounted price. In determining who receives those rights, companies set a date for 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. Sometimes, 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 1 percent of the outstanding shares of the company, that investor would get rights equal to 1 percent of the total new shares offered by the company.

Rights have their own tradable value; 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.

A simple way to estimate 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.