Rights Issues

A rights issue lets a company raise new equity capital by giving each existing shareholder the right (not the obligation) to buy additional shares, in proportion to their current holding, at a price below the current market price. If you own 1% of a company before the rights issue, you're offered the right to buy 1% of the new shares being created, so shareholders who exercise their rights in full keep their percentage ownership unchanged — the dilution only falls on those who don't participate.

Because the new shares are sold below market price, the stock's price mechanically adjusts downward once the rights start trading, reflecting the larger share count and the cash discount baked into the offer. This isn't really a "loss" for participating shareholders — the value they lose on their old shares is offset by the discount on the new ones — but it does mean the headline share price drop after a rights issue announcement shouldn't be read as bad news on its own.

Shareholders typically have three choices: exercise the rights and buy more shares, sell the rights themselves to another investor (rights often trade separately for a short window), or let the rights lapse and simply accept dilution. Companies favor rights issues over follow-on offerings when they want to raise capital while explicitly protecting existing shareholders' proportional ownership, which is why rights issues are especially common in markets (like the UK and much of Europe) where shareholder pre-emption rights are a legal norm.