Canadian Securities Course (CSC) Level 1 Practice Exam

When do right securities trade cum rights and ex-rights?

1. Trade cum rights on the ex-rights day

2. Trade ex rights on the record date

3. Trade cum rights before the ex-rights day

4. Trade ex rights on the business day before the record date

The correct answer is: Trade ex rights on the business day before the record date

The correct answer states that right securities trade ex-rights on the business day before the record date. This is crucial to understand within the context of how rights offerings function in the securities market. When a company issues rights, shareholders are given the opportunity to purchase additional shares at a specified price before a certain deadline. The record date is established to identify which shareholders are entitled to receive these rights. The term "cum rights" refers to trading that includes the right to purchase additional shares, meaning that buyers of the shares are entitled to the rights associated with them. Conversely, "ex-rights" indicates that the rights are no longer included in the sale—any buyers of the shares on or after this date will not receive the rights. The ex-rights date is set one business day prior to the record date. This timing allows for the necessary administrative processing of trades to occur, ensuring that those who hold shares up to the record date are the ones who also receive the rights. Thus, understanding this timing is essential for anyone participating in the market around a rights offering. The correct sequence of events ensures that the rights are allocated to the right shareholders before they expire, and this mechanism is what establishes the importance of the ex-rights date as occurring