Rules and Rights of Common and Preferred Stock

Purchasing New Shares

New share purchases are important actions by share shareholders since they require further investment in a business entity and reflect 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 pre-emptive 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 proportional ownership of the company, preventing stock dilution.

New shares may be purchased over the same exchange mechanisms that the previous stock was acquired. A stock exchange is a form of exchange that provides services for stock brokers and traders to trade stocks, bonds, and other securities. Stock exchanges also provide facilities for the 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.

Exchanges New shares can be traded on exchanges such as the Nasdaq, but will usually be offered to current shareholders before being put on sale to the general public.