[Beginner's Guide] Stock Prices Rise and Fall with Rights Offering... What Exactly Is a Rights Offering?

[Asia Economy Reporter Kwon Jae-hee] Last week, Jeju Air's announcement of a rights offering caused its stock price to decline from the start of trading on the 19th. However, on the same day, Namseon Aluminum saw its stock price surge by over 8% early in the session following news of a third-party allotment rights offering. Although both are 'rights offerings,' some act as negative factors for stock prices, while others serve as positive catalysts. So, what exactly is a rights offering that it influences stock prices in such different ways?

What is a Rights Offering?

First, let's understand the meaning of a rights offering. A rights offering is one of the various ways a company raises capital by issuing shares in exchange for money. Conversely, issuing shares without receiving money is called a bonus issue.

Since a rights offering raises funds directly from the stock market, it increases equity without increasing debt, making it a commonly used method for companies to raise large amounts of capital. Loans require interest payments, which are a financial burden, but rights offerings do not have such costs, making them a preferred method from the company's perspective.

Especially in a bullish market, stock prices tend to rise significantly, and investor sentiment is positive, often leading to successful rights offerings.

What Should Investors Pay Attention to in a Rights Offering?

So, what should you look out for in a rights offering disclosure? First, check how much the number of shares will increase due to the rights offering. Look at what percentage of the total shares will be issued. Typically, rights offerings involve issuing more than 30% of the existing shares. If 30% more shares are issued, the value per share will drop by about 30%.

The second important aspect is the purpose of the capital raising. Why is the rights offering being conducted? The disclosure usually states purposes such as facility funds or operating funds. Facility funds refer to capital for equipment investment. When a company expands its factory, it needs funds, which are called facility funds. Acquisition funds are for mergers and acquisitions (M&A). Operating funds are needed for running the business, and debt repayment funds are used to pay off debts.

The purpose of the capital raising determines whether the rights offering will act as a positive or negative factor for the stock price. Facility funds are generally seen as positive because they are for equipment investment.

For example, L&F conducted a large-scale rights offering under the name of facility investment funds to expand its secondary battery cathode materials production. After the offering, its stock price surged from 20,000 KRW to 48,000 KRW.

On the other hand, raising funds for operating expenses or debt repayment tends to be negative, as it indicates the company lacks immediate cash and needs to raise capital, which can negatively affect the stock price.

Shareholder Allocation, Third-Party Allocation, Public Offering... What Do These Mean?

There are mainly three types of rights offering methods: shareholder allocation, third-party allocation, and public offering.

First, shareholder allocation targets only existing shareholders. Only shareholders pay money and participate in the offering.

Next, third-party allocation targets special related parties or other investors who are not shareholders.

Lastly, a public offering is open to all investors without special restrictions, allowing anyone to participate.

In shareholder allocation, even if the stock price drops sharply, shareholders can receive new shares at a lower price, partially offsetting losses. However, public offerings often do not provide benefits to existing shareholders and tend to act as negative factors.

Other Important Points to Note?

Also, check the new share issuance price and the record date for new share allocation. The issuance price is the price at which investors participating in the rights offering receive shares, usually discounted by more than 30% compared to the current stock price. A lower issuance price allows investors to profit when they receive new shares later, encouraging participation in the rights offering.

The record date is the date that determines who is eligible to receive the new shares. Since stock settlement occurs two days after the transaction, the actual date to own the shares to receive new shares is two days before the record date.

Whether a rights offering acts as a positive or negative factor depends on the method and purpose of the offering. Therefore, if a company in which you hold shares announces a rights offering, be sure to check the details. We support smart investing for beginner investors today as well.

Editor's Note[Beginner's Guide to Stocks] is a smart investment guide for 'Joorini' (a combination of 'stock' and 'child' in Korean, meaning beginner investors).
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