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What is Rights Offering?

Welcome to the Investors Trading Academy talking glossary of financial terms and events. Our word of the day is “Rights Offering”. In a rights offering, also known as a subscription right, a company offers existing shareholders the opportunity to buy additional shares of company stock in proportion to the number they already own before any new shares are offered to the public. Such an offering is usually mandated by the corporate charter. To act on the offering, you turn over the rights you receive, typically one for each share of stock you own, and the money needed to make the purchase within the required period, often two to four weeks. The amount of money that's required is known as the subscription price. You don't have to buy the additional shares, and you can transfer your rights to someone else if you prefer. But buying helps you maintain the same percentage of ownership you had in the company before the new shares were issued rather than having that percentage diluted. For example, a company whose stock is trading at $20 may announce a rights offering whereby its shareholders will be granted one right for each share held by them, with four rights required to buy each new share at a subscription price of $19. The company will also specify that the rights expire on a certain date, which is usually anywhere from one to three months from the date of announcement of the rights offering. Companies typically issue rights to give their existing shareholders the opportunity to buy additional shares before other buyers, and also to enable current shareholders to maintain their proportionate stake in the company. By Barry Norman, Investors Trading Academy