Future Business Leaders of America (FBLA) Securities and Investments Practice Test

What is a subscription right in the context of stock offerings?

1. The right to vote on company matters

2. The ability to purchase additional shares at a discount

3. A type of fixed-income security

4. An option to buy back shares from the market

The correct answer is: The ability to purchase additional shares at a discount

A subscription right refers to the mechanism that allows existing shareholders to purchase additional shares of a company's stock, typically at a price that is lower than the current market value. This right is particularly relevant during a new offering of shares, as it enables shareholders to maintain their proportional ownership in the company and avoid dilution of their stake. In practice, subscription rights are often issued to existing shareholders when a company wants to raise capital. The discounted purchase price serves as an incentive for shareholders to exercise their rights and invest more in the company. This helps the company secure additional funding while providing existing investors an opportunity to buy more stock at favorable terms. Understanding subscription rights is crucial for investors as it can impact their investment decisions and the overall valuation of their holdings, especially in situations where the company is navigating through significant changes or expansions.