What is Pro-rata in security?
Stock Market
In the context of securities, “pro-rata” refers to the proportional allocation or distribution of something based on a fixed ratio or percentage. This concept is often used in various financial and investment contexts. Here’s how it commonly applies:
- Pro-Rata Allotment in IPOs: When a company conducts an Initial Public Offering (IPO) and receives more applications for shares than the number of shares available for allocation, it may resort to pro-rata allotment. In this case, shares are allotted to applicants in proportion to the number of shares they applied for relative to the total demand. For example, if you applied for 200 shares, but the IPO is oversubscribed, you might be allotted a lower number of shares based on the pro-rata ratio.
- Pro-Rata Dividends: In the context of dividends, pro-rata distribution means that shareholders receive dividends in proportion to their ownership or shareholding in the company. For instance, if a company declares a dividend of $1 per share and you own 100 shares, you would receive $100 in dividends.
- Pro-Rata Rights Issues: When a company issues new shares to existing shareholders through a rights offering, those shareholders have the opportunity to purchase additional shares pro-rata to their existing holdings. This means that the number of rights offered to each shareholder is based on their current ownership percentage.
- Pro-Rata Participation: In some investment arrangements, investors might have pro-rata participation rights, which allow them to invest additional capital in proportion to their existing ownership when the company seeks additional funding.
In all of these cases, the pro-rata principle ensures that distributions, allocations, or opportunities are distributed fairly and in proportion to each participant’s existing stake or request. It helps maintain equity and fairness among investors or shareholders.