Ex-Rights: Definition, Implications, and Calculation

Ex-rights shares are shares of stock that have lost their privilege to purchase additional shares at a predetermined price. This loss of privilege can occur due to the expiration of the rights offering period, the transfer of shares to another party, or the original holder exercising their rights. Once shares become ex-rights, they no longer provide any special privileges to the holder.

Rights offerings, also known as rights issues, are events where current shareholders are given the opportunity to purchase additional shares of stock at a discounted price. Companies use rights offerings as a way to raise capital for various purposes such as paying down debt or acquiring other companies. Shareholders eligible for rights receive them on a specified distribution date. Once this distribution occurs, the stock is said to be trading ex-rights, meaning that new buyers of the shares will not receive the rights associated with them.

Shares that are still trading with the rights attached are referred to as cum rights, while shares that have lost their rights are ex-rights. Cum rights shares are more valuable than ex-rights shares because they still carry the privilege of participating in a rights offering. Additionally, rights themselves can be traded separately from the shares, allowing shareholders to sell their rights if they choose not to exercise them. This ability to exercise rights and potentially purchase shares at a discount adds value to cum rights shares.

To estimate the theoretical ex-rights price of a stock, one can add the current market value of all shares existing before the rights issue to the funds raised from the rights issue sales. This total is then divided by the total number of shares in existence after the rights issue is complete, resulting in a per-share value of the rights.

Rights offerings are events where current shareholders are given the opportunity to purchase additional shares of stock at a discounted price.

Ex-rights shares have lost their privilege to participate in a rights offering, while cum rights shares still retain this privilege.

The theoretical ex-rights price is estimated by adding the current market value of all shares existing before the rights issue to the funds raised from the rights issue sales, then dividing by the total number of shares after the rights issue.