What Is a Rights Issue? When the Company Asks You for More Money
A letter arrives. The company you part-own would like more money, there's a deadline, and the discount it's waving at you is not the gift it looks like.
By Pavel Penev, MScFounder, TradeWize · 10+ years trading the marketsOne morning an envelope turns up from a company whose shares you own. It is thick, it is written by lawyers, and somewhere on page one it says you can buy more shares at a price well below what they're trading at. It also says there's a deadline. It does not say, anywhere, in plain English, that ignoring it can cost you real money.
That's a rights issue. And the discount on the front page is the single most misunderstood number in it.
The short answer
A rights issue is a company raising money by offering new shares to the people who already own it, in proportion to what they hold, at a price below the market. If you own 1% of the company, you're offered 1% of the new shares. You can take up the offer, sell your rights to somebody else, or do nothing. Taking up and selling leave you with exactly the same amount of money — what differs is how much of the company you still own. Doing nothing is the only choice whose outcome is decided by someone else.
What a rights issue actually is
A company needs cash. It can borrow it, it can sell a chunk of itself to new investors, or it can go back to its existing owners and ask. A rights issue is the third one.
The offer always comes with a ratio and a price. "1 new share for every 4 you hold, at 60p" means exactly what it says: count your shares, divide by four, and that's how many you may buy at 60p each. The ratio keeps everybody's slice of the company proportional. Nobody is offered more of the company than they already own a share of.
The reason it works this way isn't corporate good manners. In the UK it's the law. Section 561 of the Companies Act 2006 says new shares issued for cash have to be offered to existing shareholders first, in proportion to their holdings and on the same terms. Companies can get that requirement lifted, but they have to ask their shareholders for permission to do it.
The protection being offered is against dilution. Let a company sell cheap new shares to whoever it likes and everybody already on the register quietly owns less of it, with no say in the matter. A rights issue hands you first refusal instead.
Why you'll see these mostly outside the US
If you invest in London, Frankfurt, Hong Kong or Sydney, rights issues are routine. If you invest in New York, you may never see one. That isn't culture — it's a difference in what the law assumes when nobody says otherwise.
Delaware, where most large US companies are incorporated, takes the opposite default to the UK. Its corporate law states that no stockholder has any pre-emptive right to subscribe for new stock unless that right is expressly written into the company's certificate of incorporation. Silence means no rights. In the UK, silence means rights.
So US companies raising equity reach for something else. A shelf registration, an at-the-market programme dribbling new shares into the open market, or an underwritten offering to institutions. Existing holders get diluted without ever being asked. Rights offerings do still happen in the US, mostly at closed-end funds and smaller or struggling companies. They're just not the default tool.
If you hold US shares
The absence of rights issues isn't a perk. It means the dilution can happen without an envelope, a ratio, or a decision for you to make. A rights issue is at least a raise you get told about in advance and can participate in.
The discount is not a gift
Here's where most people's instincts go wrong. A discount sounds like free money — shares at 60p that everyone else pays 100p for. It isn't, and the reason is arithmetic rather than opinion.
Take a real one. In October 2020, with its engines attached to aircraft that had stopped flying, Rolls-Royce offered shareholders 10 new shares for every 3 they held, at 32p. The shares had been trading at 130p. That's a 75% discount, which sounds like the deal of the decade.
Three shares at 130p plus ten bought at 32p is £7.10 spent on thirteen shares — about 54.6p each. The quoted price more than halves, and not a penny has gone anywhere.
Follow the money. You held 3 shares worth 390p. You hand over 320p of your own cash for 10 more. Now you have 13 shares and you've spent 710p in total, so each share is worth about 54.6p.
The share price falls from 130p to 54.6p, and nobody has lost anything. There are simply more shares carrying the same company plus the cash that just came in. That blended figure has a name — the theoretical ex-rights price — and it's where the market picks up trading once the shares go ex-rights.
This is why a rights issue makes a chart look like a catastrophe when nothing happened. Price history sites that don't adjust for it will show you a company that fell 58% overnight. It didn't. It divided.
So what does the discount tell you? Less than you'd think
Since the discount mostly just moves value from the old shares into the new ones, its size is close to irrelevant to how much you're being diluted. That's governed by the ratio — how many new shares exist per old one.
An 80%-off issue that only adds one share per twenty barely touches your stake. A 13%-off issue that adds eight per three takes nearly three quarters of it.
A deep discount does tell you something, just not about dilution. It tells you the company wanted this raise to get done. Pricing the offer far below the market makes it very likely shareholders take it up, and makes it cheaper to underwrite. Companies raising money from a position of weakness discount hard, because they cannot afford a failed raise.
Learn it by doing
Reading about it is one thing — it clicks when you do it. Practise this hands-on in a free, interactive lesson (Stage 8: Corporate Actions and What They Mean for You).
Try the free lesson →Your three doors
When the letter lands you have three options, and there's a genuine surprise buried in them.
The first two land on precisely the same number. The third is a range, because what you get depends on what the shares nobody claimed eventually sell for.
Door one: take up the rights
You pay for your new shares. Your stake in the company stays exactly the size it was, and you've put more money in. This is the door for people who want to keep owning the same proportion of the business and are happy to fund it.
Door two: sell the rights
You don't have to buy anything. The entitlement itself is tradeable, and for a few weeks it sits on the market under its own line. Somebody else will pay you for the chance to buy those discounted shares. You get cash, you put in nothing, and your stake shrinks.
Here's the surprise: doors one and two leave you with identical money. Not roughly. Identically. The cash you get for selling the rights is exactly the value the market strips out of the shares you already hold. Move the slider below and watch the two totals refuse to separate.
So the choice between them was never financial. It's about ownership. Take up the rights and you own the same slice of a bigger company; sell them and you own a smaller slice plus some cash. If you liked the business enough to hold it, and you think the money is being raised for something worthwhile, door one. If you don't want to put more in, door two — but do it deliberately.
Door three: do nothing
This is the one people take by accident, usually because the envelope looked like admin. It's the only door where the outcome is out of your hands, and it's the reason this article exists.
Pick a set of real terms and a holding, then watch what each of the three choices leaves you with. Two of them always land on the same number. One of them doesn’t.
Rolls-Royce, 2020 — 10 new for every 3 held, at 32p
That entitles you to buy 2,000 new shares at 32p. Once the shares go ex-rights the market price becomes about 54.6p — a fall of 58% that costs nobody anything, because the extra shares exist to make up for it.
- You end up with 2,600 shares
- Your slice of the company: unchanged
- You keep your 600 shares
- Your slice shrinks to 23% of its old size
- You keep your 600 shares
- The un-taken-up shares were placed above the offer price
Illustrative, and it assumes the rights and the shares trade at the prices the arithmetic implies — in a real market they wander a little. Taking up and selling land on the same total by construction, not by coincidence: the discount you get on the new shares is exactly the value the market strips out of the old ones. What actually differs between those two is how much of the company you still own at the end. Real holdings rarely divide exactly by the ratio, and the entitlement rounds down when they don’t — the leftover fraction is sold for your benefit, subject to the same £5.00 floor.
What actually happens if you ignore the letter
You'll read in a lot of places that unclaimed rights simply expire worthless. For a UK-listed rights issue, that's not right, and the correction is worth having.
The FCA's listing rules make the company do something with the shares nobody claimed. They get offered to other buyers, a batch known as the rump. Any premium those buyers pay over the offer price, after costs, belongs to the shareholders who lapsed. In other words your rights get sold on your behalf, and a cheque follows.
Rolls-Royce's own results announcement spells it out. Shareholders took up 94.2% of the new shares, and the proceeds from placing the rest were to go to the holders whose rights had lapsed, pro rata.
Which sounds like doing nothing is fine. It isn't, for three reasons.
- It only works if a premium is obtained. The rules oblige the company to pass on the premium it gets, not to conjure one. If the rump sells for no more than the offer price — which is exactly what tends to happen when a raise is going badly — there is nothing to pass on and you get nothing.
- There's a floor. If your share of the proceeds comes to less than £5.00, the company is entitled to keep it. Small holdings are the ones most likely to fall through this gap, and they belong to the people least able to shrug it off.
- You've handed the timing to a stranger. The rump gets placed when the placing happens, at whatever price it fetches, which may be well below what you'd have got selling your rights yourself when you noticed the letter.
Your stake shrinks either way. On Rolls-Royce's terms, a shareholder who sat it out ended up with 23% of the slice they started with — the share count more than quadrupled. The compensation cheque, if it arrives, is compensation. It isn't the same as having made a decision.
Reading the raise: is this growth, or is this a rescue?
The mechanics are the same either way. What the money is for is not, and it's the more interesting question. Two real raises, four years apart, make the contrast about as clearly as it can be made.
| Rolls-Royce, October 2020 | National Grid, May 2024 | |
|---|---|---|
| Terms | 10 new for every 3 held, at 32p | 7 new for every 24 held, at 645p |
| Raised | About £2bn | About £7bn gross |
| Discount to the ex-rights price | 41% | 34.7% |
| New shares as a share of the old | Over three times the existing count | Under a third of the existing count |
| What the money was for | Surviving a year in which its customers' aircraft stopped flying | Funding around £60bn of capital investment over five years |
| What that tells you | The company needed the cash | The company found something to spend it on |
Figures from each company's own announcements. The discount is not what separates these two — the ratio and the stated purpose are.
So when one lands, the questions worth asking are less about the discount and more about the story. How big is the raise against the whole company — a tenth, or a multiple? What does the company say the money is for, and is it a specific thing or a general tidy-up of the balance sheet? Is the raise underwritten, meaning banks have agreed to take up whatever shareholders don't? And what did the balance sheet look like before the letter arrived?
None of this makes a rescue raise a bad investment or a growth raise a good one. Rolls-Royce recovered strongly in the years after that raise, which is worth remembering before you treat "they had to ask for money" as a verdict. The point is narrower: the same envelope arrives in both cases, and the discount on the front page won't tell you which one you're holding.
What to do when one turns up
- Open it, and find the deadline. Everything else can wait; the deadline can't. UK law requires the offer to stay open for at least 14 days, and in practice you usually get a few weeks — but that is the whole of your window.
- Find the ratio and the offer price. These two numbers tell you what you can buy and what it costs. Multiply out what taking up the offer in full would actually cost you in cash.
- Work out roughly where the price is heading. Blend your existing shares with the new ones at the offer price and you have the ex-rights price. That's the level the shares should open at, and it stops the drop looking like a disaster.
- Read what the money is for. It's in the announcement, usually in the first few paragraphs, and it's the part that distinguishes a company investing from a company patching.
- Then pick a door on purpose. Take it up, or sell the rights — both leave you financially level, and only one of them keeps your stake whole. What you should not do is decide by forgetting.
The one-line version
Taking up your rights and selling your rights leave you with the same money. Ignoring them leaves you with the same money only if a stranger's placing goes well and your share of it clears £5.
What is a rights issue in simple terms?
It's a company raising money by offering new shares to its existing shareholders at a discount, in proportion to how much they already own. Own 2% of the company and you're offered 2% of the new shares. You can buy them, sell the entitlement to someone else, or decline.
Is a rights issue good or bad for shareholders?
Neither by itself. What matters is what the money is for. A raise funding a specific investment is very different from one repairing a balance sheet, even though the paperwork looks identical. The discount on the offer tells you almost nothing about which you're looking at.
Why does the share price fall after a rights issue?
Because more shares now exist. The new shares are sold below the market price, so the value of the company spreads across a larger number of shares and the quoted price settles lower — at the theoretical ex-rights price. It's a division, not a loss, and shareholders who take part are left level.
Should I take up a rights issue?
If you want to keep the same proportion of the company and are happy to put more money in, yes. If you don't want to add money, selling the rights leaves you with exactly the same total value — just a smaller stake. Both are legitimate. Doing nothing is the option to avoid.
What happens if I do nothing in a rights issue?
In a UK-listed rights issue the unclaimed shares are sold to other buyers, and any premium over the offer price, net of costs, is paid to you pro rata. But only if a premium is actually obtained, and if your share of it comes to less than £5.00 the company can keep it. Your stake is diluted regardless.
Can I sell my rights instead of buying the shares?
Usually yes. In a rights issue the entitlement trades on the market in its own right for a few weeks, so you can sell it for cash without putting any money in. That's the whole difference between a rights issue and an open offer, where the entitlement generally isn't tradeable.
What is the theoretical ex-rights price?
It's the blended price of your old shares and the discounted new ones. Take the value of the shares you hold, add the cash paid for the new ones, and divide by the total number of shares. It's the price the market is expected to open at once the shares trade without the rights attached.
Why don't US companies do rights issues?
Because US corporate law doesn't grant shareholders pre-emption rights by default — in Delaware they exist only if written into the company's certificate of incorporation. UK and European law starts from the opposite assumption, so companies there offer new shares to existing holders first. US issuers typically use shelf or at-the-market offerings instead.