What Are Cum Rights?
Cum rights (or "with" rights) allow a shareholder of record to subscribe to a rights offering declared by a company. Owners of shares that have cum rights are thus able to buy new shares in a secondary offering, typically at a price lower than the current market price of the shares in question. Furthermore, the rights themselves have value apart from the value of the existing shares.
Cum rights may be contrasted with ex-rights.
- Cum rights are granted to existing shareholders to subscribe to a future offering declared by an issuer.
- Ex-rights are shares that allow the holder to purchase shares at the previously stated price.
- When a company offers rights to its shareholders to purchase new shares at a discount in order to maintain their proportionate ownership (i.e., no dilution), these securities are known as cum rights.
- A cum bonus describes a share that designates the purchaser the right to receive the current bonus when this bonus occurs; the overall number of shares in the market increases.
- A cum bonus represents the good health of a stock, making it easier to buy and sell.
How Cum Rights Work
Shares that still have rights available to them are referred to as cum rights. Rights, in this context, refer to the opportunity to purchase more shares of a new issue or offering at a given price. Shares of stock that confer such rights are considered to have an additional theoretical value based on the opportunity represented by those rights.
When a company offers rights to its existing shareholders to purchase new shares at a discount in order to maintain their proportionate ownership (i.e., non-diluted), these new securities have cum rights. These rights are short-term, typically 30-45 days, and can be traded in the secondary market. Being able 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 following formula calculates the value of one cum right:
Value = (market price of the stock - subscription price) / (number of rights needed to purchase one share + 1)
The +1 in the denominator adjusts pending a drop in the market price on ex-date or the first day the stock trades without rights.
When a company announces a bonus, it also announces a record date of the issue.
Cum rights are subject to NYSE Rule 703.03 and NASDAQ Rules 4310(c) and 4320(e) regarding advance notification periods, proposed subscription prices, expiration dates, and other pertinent information for a shareholder to make a decision. The 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 have yet to be distributed but are declared. Cum rights shares are rights that are still available. On the other hand, ex-rights shares have already been transferred, exercised, or have expired. Ex-rights are stock shares that allowed the holder to purchase shares at the previously stated price.
Shares trading ex-rights have passed the expiration of the rights offering period, or they have been transferred to another party (thus making the rights no longer possible to trade), or the original holder may have already exercised the rights. In any of these circumstances, the shares no longer provide 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 do not give a shareholder access to a rights offering. Renounceable rights may trade separately, allowing shareholders to choose to sell their rights rather than exercise them.
A cum bonus is a sign of a healthy company. This bonus describes a share that designates the purchaser the right to receive the current bonus when this bonus occurs; the overall number of shares in the market increases.
For example, if a company previously had 5 million shares, and a bonus issue of 3:1, the company will receive 15 million share issues. With the previous 5 million shares + received 15 million shares means there are now a total of 20 million shares. When this happens, a company must then divide the new total amount of shares; this is known as a dilution of its equity. The earnings per share or EPS of the company will now decline because the number of shares has increased, while the profits remain the same. When this occurs, the stock becomes easier to buy and sell.
Example of Cum Rights
XYZ Company has 10 million shares of common stock outstanding and is issuing 5 million additional 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 needed to purchase one share.
The value of the cum right = ($51 - $48) / (2 + 1) = $1