Stocks · Intermediate · 5 min

Capital increases and subscription rights

You can explain what a capital increase does to existing shareholders, calculate the price after a rights issue, and choose between using, selling or ignoring rights.

Your slice shrinks

Sometimes a company needs more money than it earns: to grow, to buy another company, or to survive a crisis. One way to get it is to sell new shares.

For existing shareholders, that changes the math. There are more slices of the same pie, so each slice is smaller, unless you act. In many countries, the law gives you a tool for exactly that. This lesson explains how it works and why doing nothing is the most expensive choice.

New shares, old owners

In a capital increase, a company issues new shares to raise money. The money goes to the company, but the number of shares grows. Each existing share then represents a smaller part of the company. This is called dilution.

To protect existing owners, EU company law gives them pre-emption rights. When a company raises capital in cash, the new shares must first be offered to existing shareholders in proportion to what they already hold. The period to accept must be at least 14 days. A shareholder meeting can restrict or remove this right, for example for small, quick placements, but it must justify why.

In practice, each existing share comes with a subscription right. You then have three choices:

Use the rights: buy new shares, often at a discount, and keep your share of the company.
Sell the rights: they often trade on the exchange for a short period.
Do nothing: the rights expire, and their value is lost.

Rights issues are usually priced below the market, so the share price falls once the shares trade without the right, on the ex-rights date. The expected price afterwards is called the theoretical ex-rights price. It is the average of the old and new shares, weighted by number.

Use, sell or lose

A fictional share trades at 50. The company offers 1 new share for every 4 old ones, at 30.

Theoretical price afterwards: (4 × 50 + 1 × 30) ÷ 5 = 46. Each right is worth about (50 − 46) = 4.
An investor holds 400 shares, worth 20,000, and receives 400 rights.

Use: pay 3,000 for 100 new shares, and hold 500 shares worth 23,000. Sell: receive about 1,600, and hold 400 shares worth 18,400. Do nothing: hold 400 shares worth 18,400, and the 1,600 are gone.

Using and selling both keep the investor's total wealth at about 20,000 plus or minus the money moved. Only doing nothing loses value. Some brokers sell unused rights automatically shortly before they expire, others do not, so check the instruction in the notice.

Common mistakes

Ignoring the broker's message. Rights have deadlines. Missing them loses money.
Seeing the lower price as a bargain. The drop reflects the new shares, not a cheaper company.
Assuming every capital increase comes with rights. Some exclude them, legally, and dilute you anyway.
Forgetting why the company needs money. A rescue capital increase tells a different story than one for growth.

The takeaway

New shares dilute existing owners. Subscription rights let you keep your share or sell the right. Ignoring them costs money.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the card that shows the expected price after the rights issue.

Tap the chart.

(4 × 50 + 1 × 30) ÷ 5 = 46. This theoretical price is where the share should trade once the new shares exist.
2Under EU company law, how long must existing shareholders have at least to exercise their pre-emption rights?

Directive (EU) 2017/1132 requires a period of at least 14 days from the publication of the offer.
3You hold 400 shares and do nothing during a rights issue. Your rights expire. What happens?

The price falls to the theoretical level, and the rights you did not use or sell expire worthless.
4What does dilution mean?

With more shares, each one owns less of the company, unless existing holders buy their part of the new shares.

of 4 correct.