Each share of common stock provides the investor with a right that offers the investor the first right to purchase any new shares of common stock the firm decides to issue. this allows common stockholders to maintain a proportional share of ownership in the company.

Preemptive right

Explanation:

Preemptive right is an alternative option or clause that bestows the right on investors to maintain their percentage of ownership in a company through the purchase of equivalent amount of shares. It is also called subscription right and is applicable for convertible preferred stock.

Preemptive right are of two kinds

• The weighted-average position

• The ratchet-based position.

The weighted-average position allows shareholders to buy shares at a price that will account for the differences between the previous and the new price, while the ratched-based position allows shares to be bought at new reduced price by existing shareholders.