Exercise Your Shareholder Rights

When an investment trust in your portfolio announces a rights offering, what is it doing? And what should you, as a shareholder, do?

Cara Esser, ETF Fund Analyst 30 April, 2014 | 10:40AM

Most closed-end fund investors are familiar with the mechanics behind a fund’s IPO but know decidedly less about rights offerings. To be sure, IPOs are more prominent and typically outnumber rights offerings in terms of both frequency and size, but when your fund announces a rights offering, what is it doing? And what should you, as a shareholder, do?

A rights offering allows existing shareholders to buy a proportional number of shares, based on how many they currently own, at a discounted price. Rights can be both transferable, meaning they can be traded on an exchange, and non-transferable. As a shareholder, you have the right – but never the obligation – to buy the additional shares. We believe investors should always exercise these rights.

If an investor likes the fund and want to allocate more capital to it, then exercising these rights are a no-brainer – simply subscribe to the offering. Some investors may not want to add more shares and, for those that don’t participate, their stake in the fund gets diluted. It would appear that such investors are caught between a rock and a hard place: They are either unable or unwilling to put more money into the fund, but don't want their current stake to be diluted. Well, you can have your cake and eat it, too.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Cara Esser, ETF Fund Analyst   ETF Fund Analyst

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