Cum-Rights

Cum-rights (a Latin phrase meaning “with rights”) describes a stock that is sold including the benefit of an upcoming rights issue. Think of it as a “buy one, get a special offer” deal. When a company wants to raise more capital, it might offer its existing shareholders the opportunity to buy new shares at a discount to the current market price. If you buy shares of that company while they are trading cum-rights, you are not just buying the stock; you are also buying the entitlement to participate in that discounted offer. This period lasts from the announcement of the rights issue until a specific cutoff point, known as the ex-rights date. Once that date passes, the stock trades ex-rights (“without rights”), and the seller, not the buyer, keeps the right to the discounted shares. Understanding this distinction is key to knowing exactly what you are buying and avoiding any unwelcome surprises.

Let's imagine you're interested in 'Euro-Gadgets S.A.', which is trading at €50 per share. The company announces a rights issue to fund a brilliant new factory. It offers its existing shareholders the right to buy 1 new share for every 4 they own (a 1-for-4 issue) at a special price of just €40. If you buy Euro-Gadgets shares before the ex-rights date, you've bought them cum-rights. If you buy 100 shares, you not only own those 100 shares, but you also receive the right to purchase 25 additional shares (100 / 4) at the bargain price of €40 each. However, if you wait and buy the shares on or after the ex-rights date, the stock is now trading ex-rights. The person who sold you the shares keeps the rights, and you just get the shares—no discount offer included. The market price will typically adjust downwards on the ex-rights date to reflect this loss of value.

For a value investing practitioner, a rights issue isn't just a technical event; it's a critical moment to re-assess an investment. The term cum-rights is your cue to pay close attention.

A common shock for new investors is seeing their stock's price fall on the ex-rights date. This is not a market crash; it's simple mechanics. The share is now worth less because the valuable “right” has been detached from it. Professionals estimate the new price using the theoretical ex-rights price (TERP). While the formula can look a bit technical, the concept is simple: it's the weighted average of the old shares and the new, cheaper shares. Knowing this helps you see the price drop as a predictable adjustment, not a reason to panic sell. The total value of your holding (your original shares plus your rights) should, in theory, remain roughly the same immediately before and after the stock goes ex-rights.

A rights issue is a company asking its owners—the shareholders—for more money. A savvy investor must ask why.

• Is the capital for growth? Is the company raising funds for a promising acquisition, a factory expansion, or R&D that will create long-term value? This can be a very positive sign.
• Is it to plug a hole? Or is the company in distress, raising cash simply to pay off debt or cover operational losses? This is a major red flag and may signal that the underlying business is struggling.

A rights issue forces you to revisit your investment thesis. Don't be seduced by the discount alone; evaluate the reason for the cash call.

If you find yourself holding a stock cum-rights, you have three primary options when the rights are issued:

1. 1. Exercise Your Rights: If you still believe in the company's long-term story and think the new project is a good use of capital, you can buy the new shares at the discounted price. This increases your stake in the company.
2. 2. Sell Your Rights: These rights are often tradable on the stock exchange for a short period. If you don't want to invest more money but still want to benefit, you can sell your rights to another investor. This gives you an immediate cash return.
3. 3. Do Nothing (and Lose Out): If you let the rights expire, you are essentially throwing away value. While some companies may sell the rights on your behalf and send you the net proceeds (a process called a 'tail swallow'), this is often not guaranteed and is almost always less profitable than actively selling them yourself. Doing nothing is usually the worst financial decision.