Securities Industry Essentials (SIE) ExamUnderstanding Products and Their RisksEasy
A company is issuing new shares to raise capital. Existing shareholders are given the opportunity to purchase these new shares before they are offered to the public, maintaining their proportionate ownership. This right is known as:
- ADividend Right
- BPreemptive Right
- CLiquidation Right
- DVoting Right
Show answer & explanationAnswer & explanation
Correct answer: B. Preemptive Right
Preemptive rights allow existing shareholders to maintain their proportionate ownership in a company by purchasing newly issued shares before they are offered to the public.
Why the other options are wrong
- A. Dividend rights entitle shareholders to receive a share of the company's profits, if declared.
- C. Liquidation rights refer to the order in which shareholders receive assets if a company is dissolved.
- D. Voting rights allow shareholders to vote on corporate matters, not to purchase new shares.
Preemptive Right
The right of existing common stockholders to purchase new issues of common stock before they are offered to the public.
- Protects against dilution of ownership
- Allows shareholders to maintain their percentage of ownership
- Typically offered through rights offerings
Memory trick: PREemptive rights PREserve your PREcentage.