Subscription Right

In investing, the term subscription right refers to a special privilege which may be given to all or some of a company’s shareholders.

This privilege gives shareholders the right to maintain their overall share in a company by maintaining the right to buy newly issued stock at preferential prices.

Subscriptions rights protect the value of shareholder’s shares in a company’s stock by guaranteeing that they will have the option of maintain the same share of stock if the company issues new shares.

Example: An investor buys 200,000 shares of a company’s stock during an initial public offering as shares with subscription rights. The company’s full publicly-offered stock is made up of 1 million shares, so the investor holds 20% of the company’s publicly-owned stock. Two years later, the company decides to issue an additional 1 million shares. The doubling of the company’s publicly owned shares would reduce the investor’s share of the company's circulating shares to 10%. Because the investor’s shares include subscription rights, the investor has the right to purchase 200,000 of the newly-issued shares before they are offered to the public so that they can maintain their 20% share in the company.

See also: Greenshoe option

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