What Is a Subscription Receipt and the Benefits Thereof?

Below we take you through all you need to know about subscription receipts.

The Primer

In finance, a subscription receipt, also known as a subscription right, is when the right of currency stockholders in a company retains an equal percentage of ownership by subscribing to new stock issuances at or below prices dictated by the market.

Overall, a subscription receipt (anti-dilution right or preemptive right) will raise the number of shares in the equities arena. This leads to dilution of the share's value.

A Case Study

For example, let's say that Acme International executed an offering by issuing one million common shares. The business put forward one right for each common share. Shareholders were allowed to buy common shares by exchanging two rights, and $1.5 for every share wanted.

As a result of this, the offering was oversubscribed.

The Pros and Cons

The primary advantage is that current shareholders can acquire more shares at a discounted price. If you are a long-term investor, you can build your positions in the business.

The main drawback to subscription receipts is that your ownership will be diluted because the firm is raising capital by making a secondary offering. Also, stocks will generally see a selloff when a company announces a secondary offering.

Pay Attention to What Happens at the Company

Although financial analysts say that it is best to "set it and forget it" when investing, it is still important to pay attention to what is going on with your stock from time to time. Whether it is monitoring company news or reading through notices you receive in the mail, keep tabs on what is going on with the stock.