Sep 1, 2020
What is a Rights Offering?
Companies sometimes offer existing investors a contract for new shares.
Publicly-traded companies often need to raise money to continue their operations, and one way they can do that is by selling more shares.
With that in mind, companies may conduct something called a rights offering. That’s when a public company issues a contract to existing shareholders, giving them the right, but not the obligation, to purchase additional shares of the company at a predetermined price. Rights offerings are another way for a company to raise money, by selling more shares.
Rights are a type of derivative
That price is set in a contract, which is valid until a specific date in the future, at which point the right expires.
The value of a right is determined by the current price of the stock with which it is associated. Because of this relationship, rights are referred to as a type of derivative investment product, meaning its value is derived or determined by the value of another stock. Other types of derivatives include warrants and options.
Here’s an example:*
ABC company’s stock trades at $10 per share.
ABC then conducts a rights offering, which gives existing shareholders the right to purchase one additional share at a predetermined price for every share they own at the time of the offering. In this example, the terms of the right allow an investor to purchase each additional ABC stock at a discounted price of $9.90, while the current market price of ABC stock is $10.
If you own 10 shares of ABC, you will have the right to purchase 10 additional shares at that predetermined price.The value of the right can be said to be worth $0.10 since that is the difference between the discounted price in the right and the current market price per share.
Depending on the current market price of the underlying stock, it may or may not be favorable to exercise the right when received. An investor may choose to exercise the option at a later date in order to take advantage of an increase in stock price.
Additionally, this right can be sold in the market at any point prior to the end date specified in the right. In some cases, it can be in an investor’s best interest to let the right expire, like when the right specifies a predetermined purchase price that is higher than the current stock price. In this scenario, if the investor wants to purchase additional shares, they could just buy shares in the market at a lower cost.
Stash and derivatives
At this time, Stash does not support derivative investment products of any kind, including rights, warrants, and options. Therefore if you as an investor are entitled to a right of any kind, the security will be sold by Stash at market value at the time of receipt, and you will receive the proceeds of that sale in the form of cash once the transaction settles.
*Example is a hypothetical illustration of mathematical principles, and is not a prediction or projection of performance of an investment or investment strategy.
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