Learn how to use this financial instrument, which can increase your participation in funds and increase your capital

Within the investment universe, there are little-known tools. One of them is the subscription right, which occurs when an investor in a fund or company has the right to buy shares at a pre-established price. This is a strategic advantage, as the pre-determined price of a fund's shares is generally lower than the market price.

For example, you have 100 shares of a certain fund. If that fund were to double in size, you could exercise the right to acquire those new shares or sell your interest to another interested investor. Subscription rights can be a form of leverage. investments, especially when there is an expansion of capital in the company or fund in question. Understand how this tool helps investors increase or maintain their stake in the asset.

This content is not an investment recommendation.

How does the subscription right work?

It is important to understand how subscription rights operate in order to make the most of their benefits, making the best decisions on a case-by-case basis in order to increase your earnings. 

In general, there are three options available to a shareholder with this right. When the company or fund decides to buy new shares or quotas, that is, to expand its capital, it can:

• Exercise the right: buy new shares before they are placed on the market at an attractive price;
• Sell ​​the right: if the shareholder prefers not to invest any more money at that time, he/she may sell his/her subscription right to an interested party on the open market. Trading of the right is only permitted when the offer is public, i.e., not restricted;
• Buy more right: it is also possible to increase your subscription right and increase your share in the fund or company.

Advantages and risks of subscription rights

Subscription rights offer strategic benefits to investors, but they also present risks that must be assessed before any decision is made.

Benefits

• Attractive price: The possibility of acquiring new shares or quotas at a price lower than the market price can generate significant financial gains.
• Protection against dilution: By exercising the right, the investor maintains or increases his/her share in the asset, avoiding a proportional reduction if new partners join the fund or company.
• Trading flexibility: In public offerings, it is possible to sell the subscription right on the market, converting this advantage into immediate profit.

Risks

• Capital requirement: Exercising the right requires financial availability, which may limit investors with a restricted budget.
• Uncertain valuation: The future appreciation of shares or quotas is not always guaranteed, making the investment riskier.
• Impacts of wrong decision: Failure to properly assess market conditions can lead to missed opportunities or the acquisition of assets with low return potential.

To maximize benefits and minimize risks, it is essential to consider your financial situation, long-term goals and market conditions before making a decision. [1] 

How do subscription rights benefit investors?

The subscription right can be understood as a “preemptive right”. The main benefit for the shareholder who holds this right is to maintain his/her stake in a fund or company without diluting his/her shares during the issuance of new shares or quotas.

Share dilution occurs when an investor has a smaller stake in the asset in which he or she purchased shares or stocks. This can occur after the issuance of new shares, which proportionally reduces each shareholder's share. The stake can also be reduced when new partners join the fund or company. Share dilution commonly occurs in rapidly developing companies, such as startups.

Should I exercise or sell my right?

The decision depends on factors such as the subscription price, the expected appreciation of the company and the financial situation of the investor. Those who choose to exercise their subscription right increase their shareholding in the company. However, those who do not exercise or sell this right are subject to having their shareholding reduced as new shares are issued.

In general, it works like this: if the price of the new shares is attractive, exercising the right should be a beneficial option in the long term. Otherwise, selling the right may be the best decision to increase resources without having to invest more capital.

The specific consequences of each investor's choice to hold subscription rights will vary according to:

• The subscription price;
• The expectation of company appreciation;
• The investor's capital availability.

Analyzing market conditions and considering them in relation to your financial goals is essential to making the best decision.