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Subscription Right Meaning & Definition

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Definition of Subscription Right

Subscription right is a short-term security issued in conjunction with a shareholders preemptive right. The maximum length of a right is 45 days and it is issued with a subscription price, which allows the holder to purchase the underlying security at a discount from its market price.

Applying "Subscription Right" to Securities Exams:

All common stockholders have the right to maintain their percentage ownership in the company. If the corporation wants to issue additional shares to raise new funds, existing shareholders must be offered the right to purchase the shares before the shares may be sold to other investors. This is known as a shareholders preemptive right. The corporation will issue rights to current shareholders that will allow them to purchase additional shares at a subscription price that is below the market price of the stock when the rights are issued. The investor may then elect to purchase the shares by subscribing to the offering or they may sell the rights to another investor. If the stock price falls below the subscription price the rights may expire.

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