Share Purchase Rights Definition
A share purchase right is a contract that gives the holder an option to purchase additional stock shares at a fixed price. Share purchase rights are the same as stock options. The stakeholders are the only ones who get the purchase rights. They get these rights because they can trade on exchange markets. The shareholder does not have an obligation to buy the shares, but rather he is given a choice for the purchases.
A Little More on What is a Share Purchase Right
The purchase rights allow shareholders to purchase shares in addition to the ones they already have in the company. The investors that have purchase rights but do not want more investments can let them expire, or sell them to another investor. A call option is available for investors who have many share purchase rights and would wish to reconsolidate their investments in a corporation.
An incentive program for shareholder equity valuation usually ties the purchase rights. For example, there may be shares that the company has been distributing to external shareholders. To motivate their founding team, the company decides to repackage the shares for repurchase. The founding team will compete with the external shareholders so that they can claw back their equity shares.
The benefit of share purchase rights is; the rights may sometimes be at a price below the actual market price. The investor will then have the potential to earn profits in the future.
Comparing share purchase rights to share purchase plan
The two may be similar in name, but they have different meanings. A stock buyback is a common name for the share purchase plan. A company uses it to acquire its shares back from the open market once it realizes the market is undervaluing it. However, the share purchase plan has been receiving criticism because the market views it as a compensation scheme for shareholders.
Comparing share purchase rights to options
The two financial offerings have similar features, but companies make use of them at different times. In the case of share purchase rights, shareholders of a company are the only ones who can buy the stock shares. Option buyers do not necessarily need to be shareholders to buy stock shares. Any investor in the market can buy options contracts. Both cases, however, have a time frame for the holders to make purchases.
The uses of share purchase rights
- .A company could be in debt, and they need to raise additional money to settle the debt. The company can issue out share purchase rights and use the funds that come in to pay part of the debt.
- Banks always refuse to finance startup companies, especially when they are yet to make profits. The companies can issue out share purchase rights so that they can generate the funding they need. For example, a company produces a new product, and its expectation that the product will make it in the market is very high. The company then offers its stakeholders purchasing rights for shares in the product. Those shareholders who use their rights to buy additional shares may profit in case the product becomes successful, and its pricing value rises. But, when the product fails in the market, the shareholder will incur losses.
- Share purchase rights are used by companies to motivate their shareholders.
The investors and shareholders who have share purchase rights in a company should look at the pros and cons before deciding to invest. They should have analysts check if the company is making proper use of funds, and ensure it is safe for investing.