What is a Rights Offering?
A rights offering is when a company issues a contract to shareholders that gives them the right, not the obligation, to purchase additional shares of the company at a predetermined price set in the contract, which is valid until a specific future date. Rights offerings are another way for a company to raise money.
The market value of a right is determined by the current price of the stock that it is associated with. 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. 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.
Let’s take a look at an example*:
ABC stock trades at $10 per share. ABC then conducts a rights offering which gives shareholders the right to purchase one additional share at a predetermined price for every share they own at the time of the offering. If you own 10 shares of ABC, you will have the right to purchase 10 additional shares at that predetermined price point. In this example, the terms of the right allow an investor to purchase each additional ABC stock at the discounted price of $9.90, while the current market price of ABC stock is $10. 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.
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 a preferable price movement in the stock. 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 is in an investor’s best interest to let the right expire.
*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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