What Is A Rights Offering? [COMPLETE BEGINNER’S GUIDE]

Shawn Manaher August 9, 2022 Finance

All the information you need for rights offering including how they work and what they are offered by certain investment companies.

Even if you are well versed in investment strategies and terms, you might be wondering about a rights offering. They are much different from stocks and bonds. You might be interested in rights offering if you want to take additional shares in a company.

Rights offering is similar to trading stocks. You can buy more shares in a company’s stock if you want to but you’re not required to. Sometimes there is an incentive to buy more shares such as discounts.

Once you have started to invest in a company, they might offer the option to buy additional shares if this is part of their way of making money. You don’t have to take part in a rights offering unless you want to, so don’t feel pressured. Here is more information on everything you need to know before taking part in a rights offering.

How Does A Rights Offering Work?

The process of a rights offering might seem complicated if you have never done it before or if you are new to investing. A company will always notify you that a rights offering is taking place and they will tell you how many shares are available and the price they are selling them for.

They will also usually give you a deadline where you have to make a decision and buy the share before a certain time. Once a rights offering has been made you can either buy shares or you can sell your right to buy the shares. You can also choose to take no action if the extra shares don’t interest you.

It can be hard to know if you should take additional shares or not, especially as a new investor. If you have a financial advisor it might be a good idea to discuss with them before making a choice on your own.

If you have been investing for a long time though, you might already know which decision is best for you.

Here are some things to consider before taking place in a rights offering:

Number of shares you’re financially capable of buying
The discount being offered
How the company is performing financially
The profit you might make from purchasing new shares

The company always wants you to buy new shares because it benefits them financially, therefore they might offer incentives and heavy discounts.

What Is The Purpose Of A Rights Offering?

Rights offering has a few different purposes. The main one is to allow shareholders to buy additional shares or to sell their rights to another investor on an open market. It allows shareholders to have extra shares at a discounted price.

It also allows the companies to sell more shares because people are more likely to take additional shares when they are offered a discount.

Rights offerings for closed-end funds and rights offering for stocks all work in the same way. They are all built to give their current shareholders a way to get additional shares without putting extra shares directly on the market.

Why Is A Company Offering A Rights Offering?

Some people might be wondering why a company would offer rights offering especially since the shares are very discounted sometimes. However, even though you are getting discounted shares, the company is still benefiting as well making it a great option for both parties.

Rights offerings are given when the company needs to raise some extra capital. This might happen if the company is carrying extra debt that they want to get rid of as the purchase of extra shares will allow them to pay down some of their biggest debts.

Some companies also do rights offering when they want to expand their company. They might do this as a way to make money instead of actually going into debt. When companies do this, the money goes towards opening business locations or possibly making a new product depending on the nature of the company.

Companies may also decide to offer additional shares to gain money instead of applying for business loans that might have high interest and take away funding from their company.

Rights Offering Pros

Now that you know what a rights offering is and why it might be offered to you, you might be wondering if it’s the right choice. As with all investment decisions, there are pros and cons when it comes to the rights offering.

Owning traditional shares in a company has some real pros though. You’re basically getting stock on sale. This allows you to own more shares in a company at a far lower value. Hopefully, the shares will increase in value so that you are seeing profits from the original shares and the rights offering shares.

Keep in mind you can also sell your rights to buy new shares to another investor. This allows you to make more money without worrying about the responsibility that comes with owning more shares.

The more shares you own, the more shares you will probably be offered during a rights offering. So, if you are heavily invested in a company this is a way for you to become even more invested.

There are also serious pros for the company and not just for you which is why a rights offering is usually mutually beneficial. A rights offering can help a company that is financially struggling by eliminating the form of their debt and giving them more cash flow.

Rights offering can also raise the market interest in the company. This allows for more possibilities for new investors which can drive the price of stocks up and give the company more money over time.

Right Offering Cons

Rights offering can be risky especially if the company is doing it as a way to help themselves financially. Anytime you invest in a company that has debt you are taking a risk. Sometimes rights offering can be a company’s last resort to gain more capital. This means you are buying more shares in a company that is essentially drowning.

As with any new investments, you want to make sure all the stocks you’re buying are in a company that is financially well off and responsible. You don’t want to experience loss as a shareholder.

Your position as a shareholder also decreases if you are buying more stocks and other people are also buying more stocks.

After a rights offering, there are more shares to go around so everyone’s ownership shrinks. Some people don’t care about this since their new shares were at a discount, but it’s still a real con to think about.

Is A Rights Offering Right For Me?

If you’re offered a rights offering, it’s important to think through every angle before deciding what to do. You have three main options. You can buy, sell, or do nothing. Investigating the company should be your first move. You want to make sure any debt they have is minimal and that the rights offering is not solely to eliminate debt as this makes owning more shares much riskier for you.

You also want to look over their revenue trends from the last few years. One important thing to look at is the earnings per share ratio. If there doesn’t seem to be any growth recently, it might be a good idea to purchase more shares.

It might seem like a lot of work researching all these things for a company, but it’s worth it to ensure you are making a good financial and investment decision. You also want to consider the discount. Just because the share is having a discount doesn’t mean you are getting a good deal.

For it to be a good deal, you want to make sure the shares are going to go up in value in the near future to make the discount and the share price worth it.

Main Tips For Investors

You should always use these additional shares in addition to mutual funds, real estate, and other investments. This ensures your portfolio is diverse.
If you aren’t sure what to do in a rights offering, consider talking to a financial advisor. They can invest in the company for you and help you make a decision.

In Closing

By now you should have a good idea as to what a rights offering is and whether you should partake in it or not. If you own shares in multiple companies, you might choose to do rights offering in some and not the others. By checking the fundamentals, the debt, and the growth of the company, you should be able to see if buying additional shares is the right move or not.

When you own additional shares in a company through a rights offering, you are able to get access to more shares at a discounted price. This can help you grow your share portfolio and become more of an investor with the more shares you own.