Rules and Rights of Common and Preferred Stock

New shares can be purchased on exchanges and current shareholders will usually have preemptive rights to newly issued shares.

TERMS

• Preemption

  The right of a shareholder to purchase newly issued shares of a business entity before they are available to the general public so as to protect individual ownership from dilution.

• Stock Exchange

  A form of exchange that provides services for stock brokers and traders to trade stocks, bonds and other securities.

New share purchases are an important action by share shareholders, since it requires a further investment in a business entity and is a reflection of a shareholder's decision to maintain an ownership position in a company, or a potential investor's belief that purchasing equity in a company will be an investment that grows in value.

Current shareholders may have preemptive rights over new shares offered by the company. In practice, the most common form of preemption right is the right of existing shareholders to acquire new shares issued by a company in a rights issue, a usually but not always public offering. In this context, the preemptive right is also called "subscription right" or "subscription privilege". This is the right, but not the obligation, of existing shareholders to buy the new shares before they are offered to the public. In this way, existing shareholders can maintain their proportional ownership of the company, preventing stock dilution.

New shares may be purchased over the same exchange mechanisms that previous stock was acquired. A stock exchange is a form of exchange which provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for issue and redemption of securities and other financial instruments, and capital events, including the payment of income and dividends. The initial offering of stocks and bonds to investors is by definition done in the primary market and subsequent trading is done in the secondary market. A stock exchange is often the most important component of a stock market. Supply and demand in stock markets are driven by various factors that, as in all free markets, affect the price of stocks.