Investing in Philippines: Investing word of the day: Stock Rights Offer

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Thursday, September 23, 2010

Investing word of the day: Stock Rights Offer


source: http://thismatter.com/money/stocks/rights-offering.htm


We have seen some stock rights offering lately and probably you are scratching your head asking what is a stock right anyways?

I got this this definition and explanation from http://www.answers.com/topic/stock-right

Privilege giving current stockholders the first right to buy shares in a new offering, thus maintaining their proportionate ownership interest; also called Pre-emptive Right. Suppose the investor owns 3% of XYZ Company. If the company issues 5000 additional shares, the investor may receive a stock rights offering-a chance to buy 3%, or 150 shares, of the new issue. This right enables the investor to purchase new common stock at a subscription price for a short time, usually no more than several weeks. The subscription price (exercise price) is lower than the public offering price of the stock. A single right is the privilege applicable to one old share of capital stock to purchase a certain number of shares of new capital stock. When the rights are exercised, the issuing company makes a journal entry to record the proceeds received, and the common shares are issued.

In layman's term(as much as I can :) )
Normally a company has to options to raise capital: through a debt instrument by issuance of a bond or in simpler terms "uutang" or through issuance of additional shares which is either coming from sale of unissued share or sale of new shares requested from SEC(Securities and Exchange Commission).
Stock rights, as defined above, is privileged given to current holders of the stock to buy additional shares at a lower or discounted price to preserve the percentage ownership of the current holders. So for example right now SMDC has a stock rights offer  of which the ratio is 1:3 meaning one stock right for every 3 SMDC stock currently held. Such has some added rules for current stockholders to avail such offering. 
Now what good can one get from stock rights?

The very first one is that one can avail of the allocated shares at a discount as set by the terms of the stock right offer. If you are a significant shareholder of the company you will be able to preserve your share percentage thus still having the control even after an increase in capital. 

A reminder though, when exercising or using your stock rights always read the terms and conditions. In order to trade newly acquired shares through stock right one must comply like the stock  must be fully paid and that it is traded after the listing date.

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