The Rights Offering: How Will It Affect Your Shares?

A rights offering occurs when a company offers to sell additional shares of stock to its existing shareholders. In order to entice investors to purchase, they will typically offer these shares at a discount to what the shares are trading for in the market. While this might sound like a great deal, it can also have a potentially negative impact on the existing shareholders of the company. Here are a few things to consider about the rights offering and how it can affect your shares.

Rights Offering

When a company decides to issue a rights offering, they will contact all of their existing shareholders with information about the process. They will give you a specific date on which the rights offering will occur. They will also tell you that what price you can buy additional shares and how many additional shares you will potentially be able to buy. Generally, the amount of shares that you can buy will be based on a percentage of how many shares you already own. This is designed to keep ownership percentages intact with the existing shareholders.

Why They are Offered

Many times, companies will issue a rights offering because they are in trouble financially. They might have a large amount of debt that they want to get rid of and they can sell more stock in order to raise money. This is commonly used by companies that are unable to borrow more money from lenders.

Even though this technique is sometimes used by companies that need help financially, it does not necessarily mean that a company that has a rights offering is in trouble. Sometimes, they want to raise money for a particular expansion project and would rather not borrow the money.

Impact

A rights offering can have a negative impact on the existing shareholders of the company. When you own a certain number of shares at a certain price, the price is based on the number of outstanding shares in the market. When you increase the number of outstanding shares in the market through a rights offering, the value of your shares will be diluted. They are not necessarily increasing the value of the company at all through this process. They are simply issuing more shares of stock that are available for sale to the shareholders. This can negatively impact the financial ratios that many people use to evaluate stocks. When this occurs, the value of your stocks will potentially decrease in the market. Therefore, you might be getting more shares, but the value of all your shares is decreasing.

Options

When you are part of a rights offering, you have a few different options in front of you. You can choose to participate and by the maximum number of shares. You can also ignore the rights offering and do nothing. The third option that you have is that you can trade your rights to the shares in the market. You can earn money through this tactic without actually buying the shares first.

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