A ticker symbol is an abbreviation of the company’s name. For example, Microsoft’s ticker symbol is MSFT and Netflix’s is NFLX. Ticker symbols, which got their name from the ticker tape that was originally used for quotes, are used to quickly identify a stock. The extension appears after the ticker symbol and is separated from it by a period. A rights offering is a corporate event where a company allows existing shareholders to buy new stock, often for a discounted amount, so that the shareholders can keep their existing shares of the company. For example, let’s say Microsoft did a rights offering. Shares trading as MSFT.XRT wouldn’t have the rights to buy attached.
How XRT Works
Understanding ticker extensions was more critical when trades were made based on ticker tape. Now, modern brokerage websites will report any necessary information about the stock you are purchasing. In a rights offering, shares that have a right will trade with the extension “R” and shares that are ex-rights will trade with the extension “XRT.” Shares that are ex-rights will trade for a lower price because the buyer receives no value for the right. Shares with rights will trade higher because the buyer can use the right to buy more stock at a discount to the market price.
What Is a Rights Offering?
A rights offering is when a corporation is going to issue new shares and allow existing shareholders to buy at a discounted price before the shares are offered to the public. The rights can be exercised, sold with the shares of stock, or separated from the stock and sold separately. Corporations use rights offering to raise equity capital without diluting the stock of existing shareholders as much. In a normal stock offering, new shares are issued directly to the public, and each share sold reduces the portion of the company owned by existing shareholders. A rights offering is still dilutive because shareholders have to contribute more money to retain their ownership percentage. However, it reduces the dilution by discounting the offer price.
What It Means for Individual Investors
Rights offerings aren’t common, but you’ll usually be notified by the broker if one has occured. You can call your broker if you choose to exercise or unattach and transfer the rights. In any new share offering, the business should be holding the offering for an investment that will return more than the cost of capital. Investors who buy stock require a certain rate of return, and any share issuance invested at lower than that rate is dilutive, or one that would reduce the value of the shares. A rights offering is less dilutive than a public share offering, but the same principle applies. Any time a new offering is announced, verify that the funds will be used for a profitable investment. Because shares with rights will trade at a premium to shares that are ex-rights, the premium may be the same amount or more than the difference between the price of the shares with rights price and their market price. Meaning it wouldn’t be worth it to buy the shares with rights because the premium would cost more than the benefit of the rights. Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!
