What are preemptive rights of stockholders?

Preemptive rights of stockholders are essential to protecting existing investors when a company issues new shares. These rights grant current shareholders the opportunity to purchase additional shares before the company offers them to new investors. This mechanism allows shareholders to maintain their proportional ownership in the company and prevents dilution of their investment.

When a company issues new shares, existing shareholders can exercise their preemptive rights to buy the new shares in proportion to their current ownership. For instance, if a shareholder owns 10% of a company and the company decides to issue new shares, the shareholder has the right to purchase 10% of the new shares being offered. This ensures that they retain the same percentage of ownership in the company as before the new shares were issued.

By providing these rights, companies aim to foster loyalty among investors and protect them from potential negative impacts on their investment value due to the dilution of shares. This focus on preserving ownership stakes is why the third answer accurately defines preemptive rights in the context of stockholder privileges.