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This article explains Rights Entitlement (RE) as an option given to existing shareholders to purchase additional shares in a company's rights issue. It explains rights issues, the role of RE, and how shareholders can participate in them. It also highlights the importance of understanding the process and the timelines involved in the trading of REs.
Investing in the stock market can be a thrilling yet challenging experience, with a wide range of financial options available at your disposal. One such option that puzzles most new investors is Rights Entitlement. In this article, we shall explain what Rights Entitlement is, how it works, and why it matters to you as an investor. We will break down complex terms, provide clear explanations, and offer practical advice to help you make informed decisions.
Rights Entitlement (RE) is a special privilege given to existing shareholders of a company. When a company needs to raise more capital, it can issue additional shares to its current shareholders through a process called a rights issue. Rights Entitlement allows shareholders to buy these new shares at a discounted price before they are offered to the public. It is a way for the company to reward shareholders for their loyalty.
When a company announces a rights issue, shareholders receive Rights Entitlements in their Demat accounts. These REs represent the right to purchase additional shares at a discounted rate. Think of it as a coupon that gives you the option to buy more shares at a lower price.
For example, if you own 100 shares of a company, and the company announces a rights issue in the ratio of 1:5, you will receive 20 REs. This means you have the right to buy 20 additional shares at the discounted price.
Now, as a shareholder, you have three options when you receive Rights Entitlements:
Rights Entitlements can be traded on the stock exchange, just like regular shares. This trading period is usually short, often lasting just a few days. During this time, you can buy or sell REs depending on your investment strategy.
Trading REs allows shareholders who do not want to subscribe to the rights issue to still benefit from the opportunity. By selling REs, you can potentially make a profit, while buyers can purchase these entitlements if they missed the original allocation.
Participating in a rights issue through REs can offer several benefits:
When dealing with Rights Entitlements, timing is crucial. Here's a typical timeline:
Renouncing Rights Entitlement
If you decide not to subscribe to the rights issue, you can renounce (transfer) your Rights Entitlements to someone else. This is usually done for a price, allowing you to benefit even if you don't want to buy more shares. Renouncing can be done during the trading period mentioned above.
Renouncing your REs can be beneficial if you believe that the price of the shares will not rise significantly or if you need immediate liquidity. By selling your REs, you can get some returns instead of letting them lapse.
Rights Entitlement is a valuable opportunity for shareholders to increase their investment in a company at a discounted price. By understanding how REs work and the options available, you can make informed decisions that align with your investment goals. Whether you choose to subscribe, sell, or let your REs lapse, being aware of the process and timing can help you maximise your benefits. Remember, every investment decision should be based on thorough research and alignment with your financial objectives.
Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.
This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.
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