A security that gives the company’s shareholder the option, but not the obligation, to purchase a predetermined number of the company’s shares at a predetermined price (normally less than the current market price) in proportion to the number of shares already owned. These rights are typically distributed to existing shareholders, who can trade these rights on a stock exchange. Rights are issued only for a short period of time, after which they expire. Rights give right holders the ability to buy the underlying shares, by paying the issuing company the exercise price thus receiving all the rights of ownership of the underlying asset.
Risks
Rights often involve high degree of leverage, so that a small movement in the price of the underlying security results in disproportionate large movement that can either be favorable or unfavorable in the price of the right. The prices of rights therefore can be very volatile.
In summary the dealing in rights may involve risks including but not limited to the following: credit risk, inflation risk, market risk, country risk, liquidity risk, leverage risk, exchange risk, interest-rate risk (indirect)
