Common stock rights are somewhat equivalent to special privileges: As the value of the company increases, the common stock holders automatically receive an increased share. As usual, however, some companies have by-passed this practice.
Where they are granted they may permit the stockholders themselves to have prior rights to buy any additional shares, usually at a price below the current market quotation, such rights being intended to prevent dilution of extent of interest.
For example, we will suppose that the Quicker Freezit Corporation has 200,000 shares of capital stock outstanding and wishes to sell an additional 100,000 shares for use in expanding its facilities. It may offer this new stock for a limited period of time on the basis of one new share for each two old shares owned and at a price usually somewhat below the current market. The purpose of this arrangement is that the ownership shall not be disturbed as it rests with each stockholder.
However, if a present stockholder should decide against making the purchase, then his rights may be sold for cash to an underwriting firm, or even on the open market. Should the issuing corporation be able to continue to maintain or even increase its profit margins upon the newly added shares as well as upon the old, then the purchaser of the new shares under "rights" is better off than before.
Many of the larger and better known corporations have made extensive use of rights as a means of raising new capital funds; perhaps they feel that the best potential purchaser of new stock is the satisfied owner of stock already in public hands, who realizes that his interests are being safeguarded.
A stock dividend is a means of increasing the number of outstanding shares without actually selling any additional stock. For example, suppose that the Little Gadgette Manufacturing Company has 500,000 shares outstanding and declares a 20 percent stock dividend. Then every stockholder is entitled to receive 20 percent of the shares he holds as a premium: if he holds 100 shares, he will get 20 additional shares; if he holds 10 shares, he will get two in addition, and so on, except that any fractions must be paid in cash.
The purpose of such a stock dividend is threefold: to conserve cash which, for a growing company, is often better used in the further expansion of the business; to bring down the market price to a level where more people will be able to own the stock, thus achieving a wider knowledge of the company and its products and/or services among the general public; to break up ownership into smaller bits and thus considerably increase the number of stockholders.
It is not at all unusual for a company whose shares are quoted at $60 to declare a 100 percent stock dividend so as to have the stock in the $30 price class. Some company officials are of the firm opinion that a modestly priced stock is more popular and is sought after and traded more frequently, which thus makes the company more widely known. It also seems a truism that John Doe would rather own 20 shares at $30 than 10 shares at $60. At any rate, it is an actual fact that the shares, which are not too highly priced are traded more often and are more widely distributed.
Investment requires knowledge. The more you can gather about common stocks and your rights as a stock holder, the more you increase your chances of making wise investments.