A rights issue is a corporate action that lets existing shareholders buy new shares in proportion to their current holding, usually at a discount to the market price.
Companies run a rights issue to raise capital for expansion, debt repayment, an acquisition, restructuring, or working capital. Because the offer goes to existing shareholders, it gives them the chance to keep their ownership percentage.
A rights issue dilutes any shareholder who does not take part, because the total share count rises. Before taking up the rights, investors weigh the offer price, the subscription ratio, the use of funds, the company's financial position, and the potential dilution.
A company announces a 1-for-5 rights issue at USD 8 per share while the market price is USD 10. You own 500 shares, so you receive the right to buy:
500 √∑ 5 = 100 new shares
If you exercise the rights, you buy 100 extra shares at USD 8 each, below the USD 10 market price.