Pro-rata is a principle in finance that ensures fair and equitable distribution of shares, assets, profits and other entitlements based on ownership proportion. The term ‘Pro-rata’ comes from the Latin phrase, which means ‘in proportion’ and involves allocating something according to a predetermined ratio or formula. This article seeks to explain the definition of pro-rata and how it works in practice. It also provides examples of its application across sectors like banking, insurance, and the stock market.
Pro-rata finds application in a variety of corporate actions like rights issues, bonus share issuances, stock splits and acquisitions to avoid shareholder dilution while maintaining pre-emptive rights. It also promotes equitable distribution of assets during bankruptcy, settlement of claims and dissolution of partnerships or funds. Understanding pro-rata calculations is vital as it upholds the core principle of allocating benefits or obligations based on ownership percentage. The simplicity of pro-rata formulas masks the complexity involved, yet employing them ensures proportionality, transparency and fairness, which minimizes disputes.
What does Pro-Rata mean?
Pro-rata refers to the proportionate allocation or division of something between parties based on a predetermined ratio. Pro-rata is commonly used when additional shares are offered to existing shareholders. For instance, current shareholders could feel entitled to buy a certain amount of the new shares in order to preserve their current ownership stake if the firm issues new shares. This allows them to avoid dilution of their ownership stake.
How does Pro-Rata work?
The working mechanism of pro-rata allocation is centred around the core principles of pre-defined ratios, proportionality and equality. The first step is defining the ratio or proportion based on which the pro-rata distribution will happen. For instance, in a bonus issue of 1:1, the ratio is 1 bonus share for every 1 share held. In a stock split of 1:2, the ratio is 2 split shares for every 1 pre-split share. The ratio is fixed beforehand based on fair criteria like existing shareholding, stake in an acquired company, etc. It sets out the proportion based on which shareholders’ entitlements will be calculated. Defining this upfront ensures transparency.
Once the ratio is set, individual shareholder entitlements are calculated using their existing shareholding. A shareholder who owns 1000 shares and the ratio is 1:5 is entitled to 200 shares, or 1000/5.
This entitlement rewards larger shareholders proportionately as per their stake. A 2% shareholder gets twice the entitlement compared to a 1% shareholder. This upholds the concept of proportional justice based on shareholding. The aggregate entitlements of all eligible shareholders are tabulated. In oversubscribed situations, the entitlements are proportionately reduced for all shareholders. The ultimate allotment ratio is 1000/5000 = 0.2x if there are 1000 shares available but 5000 total entitlements.
So, each shareholder’s entitlement was reduced proportionately to 20% of their calculated entitlement. This ensures equitable allotment in proportion to ownership. No set of shareholders suffers more than others. Any fractional entitlements are rounded off or dealt with as per regulations. Generally, fractions are rounded off to the lower integer or higher integer. The final pro-rata allotment is made to shareholders based on their proportionate entitlement ratios.
What is the Formula for Pro-Rata?
The basic pro rata formula is as stated below.
Allocation to shareholder = (Number of shares held by shareholder / Total number of shares) x Total allocation
This simple formula is adapted and applied in different situations in the stock market.
Existing shareholders are entitled to subscribe for new shares in proportion to their current holdings when a firm announces a rights issue of new shares. The company will decide a ratio, say 1 new share for every 5 existing shares held. The pro rata entitlement for each shareholder will be calculated using the formula as stated below.
Rights entitlement = (Number of existing shares held / Ratio)
For instance, a shareholder holding 100 shares will be able to subscribe for 100/5 = 20 rights shares if a business with 1,000 outstanding shares announces a 1:5 rights issue, applying the pro rata calculation as stated below.
Rights entitlement = (100 shares held / 1 new share for every 5 existing shares)
= 100/5 = 20 shares
The total number of new shares issued will be equal to the total number of existing shares/ratio. In this case, 1,000/5 = 200 new shares.
A dividend is paid to shareholders according to their holdings when a firm declares one. The pro rata formula for calculating the Dividend per share is given below.
Dividend per share = (Total dividend / Total outstanding shares)
A company’s Dividend per share is Rs. 50 if it declares a Rs. 50,000 total payout, and there are 1,000 outstanding shares.
The total dividend received by each shareholder is stated below.
Total Dividend = Number of shares held x Dividend per share
So, a shareholder with 100 shares will receive 100 x Rs. 50 = Rs. 5,000 as dividend.
Bonus shares are allocated to existing shareholders in proportion to their holdings. The pro rata formula for the bonus issue is given below.
Bonus shares = (Number of shares held / Bonus ratio)
A corporation will issue one bonus share to each shareholder for each share owned if it announces a 1:1 bonus issue. So, a shareholder with 100 shares will receive 100 bonus shares.
In a 1:2 ratio, a shareholder with 300 shares will receive 300/2 = 150 bonus shares.
The total number of bonus shares issued is calculated below.
Total bonus shares = Total existing shares / Bonus ratio
So, in a 1:1 bonus issue of a company with 1,000 outstanding shares, the total bonus shares will be 1,000.
Sometimes, in a rights issue, not all shareholders subscribe to their full entitlement to rights shares. This leads to the subscription issue. In such cases, the unsubscribed portion is allocated to shareholders who have applied for additional shares over their rights entitlement. This is done on a pro-rata basis.
The pro rata allocation is based on the ratio of additional shares applied by the shareholder and the total additional shares applied for.
In the event that a rights issue had 100 shares that were not fully subscribed and that Shareholders A and B had applied for 50 and 100 additional shares, respectively, 33 and 67 shares of the unsubscribed 100 shares, respectively, would be distributed to Shareholder A, who had applied for 50 and 100 additional shares, in accordance with their respective ratios of additional applications.
So, the unsubscribed 100 shares will be allocated between A and B in the ratio of their additional applications.
A proportional distribution of shares is made to investors in an initial public offering (IPO) in the event that the issue is oversubscribed. SEBI guidelines specify the exact pro rata allotment rules.
The shares are allocated in the ratio of shares applied for to total shares applied under each category of investors. The formula is as follows.
Allotment to investor = (Shares applied by investor / Total shares applied in category) x Total shares allotted to category
This ensures a fair allotment of shares when there is excess demand in an IPO. The allotment under each investor category (retail, HNI, QIB) is done separately.
In the case of open-ended mutual funds, unit holders redeem their units at any time. Redemptions are handled on a pro-rata basis in the event that the total number of redemptions made on a given day surpasses the liquid assets of the fund.
The formula is given below.
Pro rata redemption = (Units being redeemed / Total units being redeemed) x Liquid assets available
This guarantees equitable distribution in the event that redemptions surpass available liquidity. Partially redeemed requests are carried forward to the next day.
How to Calculate Pro-Rata?
To calculate the pro-rata allocation in the stock market, gather each investor’s contribution amounts and time periods, calculate total contributions on a uniform basis, determine ownership percentages, and allocate end value based on proportional ownership.
Gather the relevant financial data needed for the pro-rata Calculation. This includes the total value of the investment or asset pool, the individual contribution amounts of each investor or party entitled to the asset, and the time period for which each investor contributed capital.
For example, suppose three investors contribute to a pooled investment fund over the course of a year. Investor A contributed Rs. 50,000 for the full year. Investor B contributed Rs. 75,000 for 6 months. Investor C contributed Rs. 100,000 for 3 months. The total value of the fund at year-end is Rs. 500,000.
Calculate the total capital contributed by all investors over the time period. In this example, Investor A contributed for 12 months, Investor B for 6 months, and Investor C for 3 months. Convert each investor’s contribution to a monthly amount by dividing by the number of months they participated.
Investor A: Rs. 50,000 / 12 months = Rs. 4,167 per month
Investor B: Rs. 75,000 / 6 months = Rs. 12,500 per month
Investor C: Rs. 100,000 / 3 months = Rs. 33,333 per month
Add up the monthly contributions to get the total capital contributed on a monthly basis.
Rs. 4,167 + Rs. 12,500 + Rs. 33,333 = Rs. 50,000 total monthly contributions
Determine each investor’s pro-rata share of the total fund by dividing their total contribution amount by the total contributions.
Investor A: Rs. 50,000 / Rs. 50,000 = 20%
Investor B: Rs. 75,000 / Rs. 50,000 = 30%
Investor C: Rs. 100,000 / Rs. 50,000 = 50%
So Investor A contributed 20% of the total capital, Investor B 30%, and Investor C 50%.
Allocate the end value of the investment fund (Rs. 500,000) pro-rata based on each investor’s ownership percentage.
Investor A: 20% x Rs. 500,000 = Rs. 100,000
Investor B: 30% x Rs. 500,000 = Rs. 150,000
Investor C: 50% x Rs. 500,000 = Rs. 250,000
What are the advantages of Pro-Rata?
The advantages of pro-rata are that it provides proportional allotments to shareholders in corporate actions like rights issues, bonus shares, stock splits, and demergers based strictly on ownership percentage to ensure fair treatment, reduce dilution, maintain pre-emptive rights, prevent discrimination against minorities, and promote equity in the stock market.
1.Rights Issues
One common use of pro-rata in the stock market is for rights issues. A firm sometimes issues new shares if it needs to raise more money. Existing shareholders often have the right of first refusal to buy these new shares in proportion to their existing shareholdings. This allows current shareholders to maintain their ownership percentage and avoid dilution. The new shares are offered to eligible shareholders on a pro-rata basis. Using a pro-rata mechanism ensures the rights issue is fair for all existing shareholders.
2. Open Offers
Similarly, open offers involve issuing new shares to raise capital. Under Indian regulations, open offers must be made to all shareholders on a pro-rata basis. The offer must be proportional to the number of shares already owned. This prevents selective allotment of shares to certain large shareholders and ensures the process is equitable. Pro-rata open offers give equal opportunity to all shareholders.
3. Bonus Issues
A corporation might distribute free bonus shares to current owners when its cash reserves increase. Indian companies often issue bonus shares instead of dividends. The bonus issue of shares is done on a pro-rata basis. Shareholders receive bonus shares in proportion to their current shareholding. This maintains the ownership percentage of all shareholders. Pro-rata bonus issues are advantageous as they reward shareholders without altering proportional ownership.
4. Stock Splits
Stock splits increase the number of shares outstanding by splitting each share into multiple shares. This reduces the market price and increases liquidity. Stock splits require changing the number of shares on a pro-rata basis. Every shareholder will receive two shares for each share they previously held in the event of a 1:2 split. This leaves the ownership percentage unchanged after the split. Pro-rata stock splits ensure fairness and proportionality.
5. Preferential Allotments
Preferential allotments allow private allotment of shares to select investors. To balance the interests of existing shareholders, Indian regulations also require preferential allotments to be made to existing shareholders on a pro-rata basis. The pro-rata rule compels companies to allot shares to existing holders proportionally, along with the preferential allotment. This reduces dilution and preserves shareholder interests.
6. Oversubscription in IPOs
In an oversubscribed initial public offering (IPO), pro-rata allotment ensures a fair allocation of shares. Only 50% of the shares asked for will be awarded to each bidder in an IPO if bids exceed the number of shares offered. The remaining shares are allotted on a proportionate basis. Pro-rata allotment is essential in oversubscribed IPOs to provide equal treatment to all applicants.
7. Takeover Offers
During acquisitions, substantial shareholders must provide an exit opportunity to minority shareholders. Takeover offers made to minority shareholders must be on a pro-rata basis. Shareholders sell their pro-rata portion of shares to the acquirer. This allows equitable divestment for shareholders who do not retain a stake post-acquisition.
8. Demergers and Spin-offs
In demergers, as a company splits into separate companies, shares of the new entities are distributed pro-rata to existing shareholders. Similarly, spin-offs also allocate shares in the newly spun-off entity on a pro-rata basis to provide proportional ownership. Pro-rata mechanisms enable restructuring while protecting shareholder interests.
9. Liquidation Value Distribution
The revenues of an asset sale made by a bankrupt firm are allocated among shareholders according to their percentage of ownership. Preferential payouts are avoided by adhering to pro-ratas. This prevents discrimination against minority shareholders during liquidation payouts.
10. Mutual Funds
In mutual funds, all investors receive proportionate units based on their investment. No preferential treatment or discretion occurs. Payout of dividends to unit holders occurs pro rata at the time of declaration. Pro-rata mechanisms underline the fairness and equality in mutual fund investments.
11. Venture Capital Investments
Venture capital firms often invest together in startups. The investment round involves complex pro-rata calculations to determine proportional allotments to each investor based on their relative participation. Pro-ratas ensure pre-emptive rights to existing investors are balanced with allotments to new investors.
The use of pro-rata principles across corporate actions and investment scenarios promotes equitable treatment of shareholders and upholds fairness in capital market operations.
What are the disadvantages of Pro-Rata?
The disadvantages of pro-rata allotment are that despite aiming to ensure fairness, pro-rata mechanisms potentially dilute minority shareholdings, compel distress sales, increase costs, reduce liquidity, and fail to provide proportionate control to retail investors owing to their negligible voting rights and lack of access to information and resources.
1. Rights Issues
In rights issues, following pro-rata sometimes compels small investors to invest more funds to subscribe to their share of rights entitlement. Retail investors with limited capital are not able to participate fully. Their shareholding gets diluted if they do not take up the rights issue offer. Pro-rata rights issues lead to forced selling by small investors.
2. Open Offers
Pro-rata requirements in open offers imply retail investors also have to participate proportionately. They sometimes lack the financial capacity to subscribe to their share of the offer. The inability to participate dilutes their ownership stake. Pro-rata open offers sometimes worsen wealth inequality as larger investors gain higher allotments.
3. Bonus Issues
Though bonus issues appear beneficial for all shareholders, they reduce the market price of shares due to the increased number of shares. This lowers the overall portfolio values of small investors. A high frequency of bonus issues sometimes indicates suboptimal capital allocation by the company.
4. Preferential Allotments
The mandatory pro-rata allotment alongside preferential allotment still dilutes the ownership of minority holders. Pro-rata allotment only reduces the extent of dilution but does not prevent it. Retail investors get a proportionate yet small number of shares.
5. Oversubscribed IPOs
In oversubscribed IPOs, the pro-rata allocation method limits allotment to small investors. Since applications are capped at a maximum bid lot, large bidders gain in the pro-rata allotment. Retail investors receive only a tiny proportion of shares.
6. Takeover Offers
Though mandatory, pro-rata takeover offers do not benefit minority shareholders much. The offer price is usually unattractive. Investors are compelled to sell out at a discount to the market price. For minority holders, a forced exit at an unfavourable valuation is a loss.
7. Spin-offs
In spin-offs, pro-rata distribution of new shares sometimes does not appeal to small investors. They have limited capacity to hold shares in multiple new entities post-restructuring. Faced with no choice, retail investors end up selling spin-off shares at a loss.
8. Voting Rights
Despite owning shares on a pro-rata basis, small shareholders have limited voting rights due to their negligible stake. They cannot influence any shareholder resolution. Pro-rata ownership does not empower minority investors with proportionate control.
9. No Role in Decision Making
Adhering to pro-rata allotment does not imply any role in corporate decision-making for minority holders. They do not participate in rights issues or preferential allotment of IPO pricing decisions, which impact their investment value. Pro-rata ownership does not equal pro-rata control.
10. Indirect Expropriation
Company insiders make strategic decisions that favour themselves while technically following pro-rata norms that appear fair. For instance, IPO pricing is sometimes deliberately set too high. Or rights issue prices are sometimes too low to force minority shareholders to sell out. Pro-rata mechanisms potentially mask indirect expropriation of minority interests.
11. Reduced Float for Trading
Frequent rights issues, bonus issues and stock splits increase the number of shares but reduce the public float available for trading. This negatively impacts the stock’s liquidity and price discovery. For minority holders, liquidating their investment becomes tougher despite owning shares on a pro-rata basis.
12. Demergers
In demergers, small investors sometimes get shares in an entity they did not want to own in the first place. They are allotted shares due to the pro-rata rule. Given no choice, they end up selling these shares quickly at a loss. Forced ownership followed by distress sale causes value erosion.
13. Costs
Participating in rights issues, open offers, and takeover bids on a pro-rata basis has transaction costs for minority shareholders. Costs like brokerage, demat charges and taxes incurred repeatedly erode the investment returns of retail investors over time despite allotments being proportional.
14. Information Disadvantage
To decide whether to subscribe to a pro-rata rights issue or open offer, minority shareholders need information on valuation, future prospects, investment risks and so on. Lack of expertise, resources, and access puts small investors at a disadvantage compared to institutional investors who participate in pro-rata allotments.
15. Regulatory Arbitrage
Promoters sometimes allocate shares to foreign entities where securities regulations are weaker, even while following pro-rata norms in the home country. For instance, shares are allotted to offshore subsidiaries through ODIs without reducing domestic pro-rata allotment. Regulatory arbitrage defeats the purpose of pro-rata allotment.
16. Non-voting Shares
Companies issue super-voting rights shares or non-voting shares to founders and management in a pro-rata manner. This gives them control that is disproportionate to their economic ownership. Minority shareholders sometimes own ordinary shares pro-rata but have negligible voting power due to the dual-class share structure.
Lack of financial capacity, voting power, information access, regulatory gaps and costs involved in participating in pro-rata corporate actions present major disadvantages for small investors.
What is an example of Pro-Rata?
One common example of pro-rata in the Indian stock market is in the allocation of shares during an Initial Public Offering (IPO). A business must select how many shares to allot to various investor groups, such as retail investors, high-net-worth people, institutional investors, etc., when it chooses to list its shares on the stock exchange through an initial public offering (IPO). For example, let’s take the case of ABC Ltd, a hypothetical Indian company going for an IPO. ABC Ltd has decided to offer 10 crore shares to the public through the IPO. Out of this, 2 crore shares are reserved for retail investors, 4 crore for institutional investors like mutual funds and insurance companies, and the remaining 4 crore for high-networth individuals. This determination of the number of shares for each investor class is done on a pro-rata basis as a percentage of the total IPO size.
In terms of actual allocation, not every applicant will receive the quantity of shares they sought if the IPO is overcrowded. The shares will be allotted on a proportionate basis.
What is Pro-Rata for Interest Rates?
Pro-rata interest calculations are commonly used to determine interest obligations in finance situations such as early bond/CD redemption, partial period loan interest accrual, interest on fractional shares, and adjustable rate mortgages. The key point is that pro-rata looks at the actual time an investment or loan was outstanding when calculating interest rather than simply applying the full-term interest rate. This provides a fair and accurate determination of interest owed based on the time period the Principal was actually held or borrowed. Pro-rata allows for proportional interest calculations in situations where interest rates change mid-period or the Principal is held for less than the full original term.
The pro-rata interest formula calculates interest owed as the original principal amount multiplied by the stated interest rate and the fraction of the total time period that the Principal was actually held or borrowed. The formula to calculate pro-rata interest is as stated below.
Pro-Rata Interest = Original Principal x Stated Interest Rate x (Time Held / Total Time Period)
Where the original Principal is the initial investment or loan amount, the Stated Interest Rate is the full-term interest rate percentage, the Time Held is the actual time the Principal was invested or borrowed, and the Total Time Period is the full term of the investment or loan.
To demonstrate, say an investor purchases a 2-year bond with a Rs. 10,000 principal and a 4% coupon rate. After 1 year, the bond is sold. The pro-rata interest is given below.
Original Principal: Rs. 10,000
Stated Interest Rate: 4%
Time Held: 1 year
Total Time Period: 2 years
Pro-Rata Interest = Rs. 10,000 x 0.04 x (1 / 2) = Rs. 200
Rather than the Rs. 400 full 2-year interest, the investor owes Rs. 200 in interest for the partial 1-year period held.
Pro-rata calculations are used to determine proportional dividend payments in cases such as for shares bought or sold between dividend dates; dividends are prorated based on the portion of the period the shares were owned. With dividend reinvestment purchases, any additional fractional shares purchased between dividends are entitled to a pro-rata dividend. In stock spin-offs, the divided shares sometimes have a split dividend entitlement requiring pro-rata Calculation to determine the proportional payment. Similarly, post-stock split fractional shares also get pro-rated dividend payments based on the time held. The key point is that dividends are not “all or nothing” based on a single holding date but rather divided mathematically based on the time period the shares were actually owned. Pro-rata ensures fair proportional dividend payments in these situations.
The pro-rata dividend payment is calculated by multiplying the number of shares owned by the Dividend per share and the fraction of the total dividend period the shares were held. The formula to determine pro-rata dividend entitlement is given below.
Pro-Rata Dividend = Shares Owned x Dividend Per Share x (Days Held / Total Days in Period)
Where Shares Owned are the Number of shares entitled to the Dividend, Dividend Per Share is the full dividend amount per share for the period, Days Held are the number of days the shares were held in the period, and Total Days in the Period are the total days from dividend payment to payment.
For example, say an investor buys 75 shares 30 days before the next dividend date. The Dividend is Rs. 0.50 per share annually, paid quarterly. So, for the 90-day quarter, the Dividend will be as given below.
Shares Owned: 75
Dividend Per Share: Rs. 0.50
Days Held: 30
Total Days in Period: 90
Pro-Rata Dividend = 75 x Rs. 0.50 x (30 / 90) = Rs. 12.50
Instead of the Rs. 37.50 for the full quarter (75 shares x Rs. 0.50), the pro-rata Calculation determines the proportional Dividend owed based on the 30 days held.
What is Pro-Rata for Insurance Premiums?
Pro-rata is a method of precisely calculating insurance premiums based on the actual number of days of coverage provided. Rather than dividing premiums into equal instalments or rounding to the nearest month, pro-rata looks at the exact coverage period. Common situations involving pro-rata premium calculations include client-initiated mid-term cancellations, where the refunded premium is prorated for the remaining partial year; insurer-initiated cancellations, where unearned premiums are refunded on a daily pro-rata basis; changes to the risk profile mid-term, such as different deductibles or moving residences; instalment payments, where each payment is proportional to the days of coverage in that period; and short-term event policies that only charge for the necessary coverage days rather than a full policy period. The goal of pro-rata is to divide insurance premiums proportionally and fairly based on the number of days the policy was in effect.
The pro-rata insurance premium is calculated by multiplying the annual policy premium by the ratio of the number of days covered to the total number of days in the policy period. The standard formula to determine pro-rata insurance premiums is given below.
Pro-Rata Premium = Annual Policy Premium x (Days Covered / Total Days in Policy Period)
Where the annual Policy Premium is the full premium for the entire policy term, Days Covered are the actual days insured during the policy term, and Total Days in the Policy Period are the total days from inception to expiration of the policy term.
For instance, the premium for a 365-day house insurance policy with a Rs. 2,000 yearly premium that is terminated after 90 days of coverage is determined as follows.
Annual Policy Premium: Rs. 2,000
Days Covered: 90
Total Days in Policy Period: 365
Pro-Rata Premium = Rs. 2,000 x (90 / 365) = Rs. 495
What is Pro-Rata in Law?
Pro-rata, in law, determines a party’s share based on a calculated ratio. Rather than an equal division, pro-rata calculates specific percentages owed based on quantifiable factors like time, contribution, fault, or ownership stake. Key to pro-rata is mathematical precision in allocating legal rights and duties fairly to all interested parties. It aims to award exact percentages based on relative quantitative factors, not just equal splits.
What is Pro-Rata in Accounting?
Pro-rata analysis is used in accounting to allocate revenues, expenses, assets, and taxes properly across time periods and entities. For projects spanning fiscal years, revenues are recognized pro-rata as performance obligations are satisfied. Expenses like rent and insurance are accrued pro-rata into the correct periods based on time. Depreciation expense is calculated pro-rata based on an asset’s useful life rather than taken as a lump sum when acquired. For shared assets and costs, valuation and allocation are done pro rata based on ownership percentages or usage metrics. Similarly, multi-region entities apply pro-rata calculations to apportion tax liabilities across jurisdictions based on revenues or assets. Using pro-rata allows for a more accurate representation of financial performance over time.
The pro-rata amount is calculated by multiplying the total amount by the ratio of the relevant metric to the total metric.
Pro-Rata Amount = Total Amount x (Relevant Metric / Total Metric)
Where the Total Amount is the full amount being allocated, the Relevant Metric is the entity’s proportional share, and the Total Metric is the total base for allocation.
For example, say total supplies expense last month was Rs. 5,000. Department A had 20 employees while Department B had 10 employees. The 30 total employees is the usage base. So, the pro-rata allocation is given below.
Department A:
Total Amount = Rs. 5,000
Relevant Metric = 20 employees
Total Metric = 30 employees
Pro-Rata Supplies Expense = Rs. 5,000 x (20/30) = Rs. 3,333
Department B:
Pro-Rata Supplies Expense = Rs. 5,000 x (10/30) = Rs. 1,667
Can you apply Pro-Rata in Investment?
Yes. Pro-rata is a principle that can be applied in investment contexts to allocate gains, losses, fees, etc., proportionately based on ownership stake. Pro rata distribution of profits and losses is possible when several investors jointly hold an asset, such as a fund or stock. In the event that Investor A holds 60% of a stock and Investor B owns 40%, A would receive 60% of any dividends or price increases in the shares, with B receiving 40%. Likewise, in the event that the stock’s value drops, losses would be distributed according to ownership interest pro rata. This ensures each investor shares proportionately in the ups and downs of the investment based on their ownership percentage.
Can you use Pro-Rata in the Stock Market?
Yes, pro-rata is used in the stock market. Pro-rata is commonly used when allocating shares during a rights issue. Existing shareholders are granted the opportunity to purchase more company shares in proportion to their current holdings when a firm conducts a rights issue to raise extra capital. The allocation of these rights shares is done on a pro-rata basis. The use of pro-rata allocation in rights issues is done to be fair to all existing shareholders of the company.
What is the difference between Pro-Rata and Prorated?
The main difference between pro-rata and prorated is that pro-rata refers to the proportionate allotment of something like shares to existing shareholders based on their current ownership percentage, while prorated refers to an amount that has been divided or calculated on a proportional basis over a specific period of time.
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