Cum Rights
What Are Cum Rights?
Cum rights (or "with rights") permit a shareholder of record to subscribe to a rights offering declared by a company. Owners of shares that have cum rights are able to buy new shares in a secondary offering, regularly at a price lower than the current market price of the shares in question. This extra benefit gives such shares of stock an extra hypothetical value.
Cum rights might be contrasted with ex-rights, which are shares that never again have rights connected to them.
How Cum Rights Work
Shares that still have rights available to them are alluded to as cum rights. Rights, in this context, allude to the opportunity to purchase more shares of another issue or offering at a given price. Shares of stock that give such rights are considered to have a [additional hypothetical value](/hypothetical value-of-a-right) based on the opportunity represented by those rights.
Should the company seek to raise capital through a rights offering, owners of cum rights shares can keep up with their proportionate ownership and keep away from dilution. These rights are short-term, commonly 30-45 days, and can be traded in the secondary market. Having the option to exercise the rights and buy shares at a discount gives the rights holder an immediate gain in value. Selling the rights essentially equates to free money for the shareholder.
The accompanying formula calculates the value of one cum right:
Value = (market price of the stock - subscription price)/(number of rights expected to purchase one share + 1)
The +1 in the denominator adjusts pending a drop in the market price on the ex-date or the first day the stock trades without rights.
Special Considerations
Cum rights are subject to NYSE Rule 703.03 and Nasdaq Rules 4310(c) and 4320(e) with respect to advance warning periods, proposed subscription prices, expiration dates, and other relevant information for a shareholder to pursue a choice. The Securities and Exchange Commission (SEC) requires the filing of Form S-1, a registration statement for the rights offering.
Cum Rights vs. Ex-Rights
A stock that trades with cum rights allows new buyers instead of sellers to collect the rights that still can't seem to be distributed yet are declared. Cum rights shares are rights that are still available. Then again, ex-rights shares have proactively been transferred, exercised, or have expired. Ex-rights are stock shares that permitted the holder to purchase shares at the previously stated price.
Shares trading ex-rights have either passed the expiration of the rights offering period, as of now been exercised by the original holder, or have been transferred to another party (thus making the rights as of now not possible to trade). In any of these circumstances, the shares never again give the holder any special privileges.
Ex-rights shares are worth less than shares that are still trading cum rights (not yet ex-rights); ex-rights shares don't give a shareholder access to a rights offering. Renounceable rights may trade separately, permitting shareholders to choose to sell their rights as opposed to exercise them.
Example of Cum Rights
XYZ Company has 10 million shares of common stock outstanding and is issuing 5 million extra shares through a rights offering. The stock is trading at $51 per share, and the rights have a subscription price of $48 per share. Two rights are expected to purchase one share.
The value of the cum right = ($51 - $48)/(2 + 1) = $1
Highlights
- They give shareholders the option to purchase new shares at a discount to keep up with their proportionate ownership and stay away from dilution.
- Cum rights enable existing shareholders to subscribe to a future offering declared by an issuer.
- Shares that give such rights are considered to have an extra hypothetical value.
