Question

The right of common shareholders to protect their proportionate interest in a corporation by having the first opportunity to buy additional proportionate shares of common stock issued by the corporation is called a:

Answer 1

Answer:

Preemptive right

Explanation:

Preemptive right is a shareholder's right to buy additional shares every time the company issued a new one.

This right is held by the shareholders in order to maintain the amount of ownership percentage that they have over the company.

For example,

Let's say that you own 1,000 shares from the total of 10,000 shares. At this point, you own around 10% of the company. If the company decided to issue another 10,000 shares but you still only hold 1,000 shares,

your ownership of the company will fall to 5% (1,000/20,000 x 100%)

This is why preemptive right is seen as very favorable for the shareholder.