With an initial rights offering, a company generally gives its shareholders the right to buy additional shares at a specified price that is usually below market value. A shareholder must usually exercise the right within a short period, for instance, between six and eight weeks, or put it up for resale if possible.

The new shares are an underlying interest.

Shareholders generally do not have to pay for the subscription rights they receive.

Expected return

The return consists of capital gains (or losses).

The return depends on the profit generated. The market value of a right tends to decline as it approaches its expiry date.

If the strike price of a right exceeds the price of the share at expiration, its value is nil.

Liquidity

Some rights are listed on an exchange. Restrictions may apply to reselling these rights.

Risk

Medium to high. The risk depends on the underlying interestAn underlying interest is the asset upon which a derivative (call or put option, futures, etc.) or other investment (such as exchange-traded funds) is based and that influences its value. The underlying interest may be a stock, an index, a currency or a commodity. and the manner in which the right is used.

  • If the right is used for hedgingHedging consists of making an investment to offset possible losses on another investment.

    For example, an investor who owns shares could buy a put option on the shares they hold. This way, if the shares decline in value, the investor can exercise the option to offset the decrease in the value of the shares.
    purposes, the risk is reduced.
  • If it is used for speculation purposes, the risk is high. However, given their short maturity, they are seldom used for speculation purposes.

An investment in rights is more suitable for sophisticated investors.