I’ve seen a few stock message boards lately where investors are confused, and often upset, about “rights” showing up in their brokerage accounts. The upset part is often related to fact that the stock they own in the underlying company is going down.
The storyline goes something like this.
Day One, 30 days until rights expiration (investor looks at brokerage account online while driving to work, wasting the first 3 hours of work surfing the web, or after seeing one of those “I think it’s time we got back into the market” commercials on TV): Hmmm, I own ABC stock, but now I see there is something called ABCR in my account. What the hell is that? Oh, look at my balance, I’m up $1,000 and it looks like it’s all this ABCR. SWEET!
Day Ten, 20 days until rights expiration: Hunh, looks like the market is going up but ABC is headed down. Those ABCRs are still in my account, but they are worth less now as well. Dang, they are now only worth $500 and my ABC is down $500, there went all my free money, crap.
Day Twenty Five, 5 days until rights expiration: SON OF A #%$^#$! What the hell is going on with ABC? The market is en fuego, I think that’s what Cramer called it last night, and this f’ing stock is getting killed. (Actual quote from a message board: “S&P500 and DOW new highs and no one invited ABC[stock symbol changed to protect the innocent]…What!!!!”) What ARE these ABCRs, they’re totally worthless, why are they in my account, wonder if I can sell them. I’m OUT, selling this junk right now. ABC is for losers.
Day Thirty One, 1 day after rights expiration: OHHH MYYY GOD!! What is the news on this ABC, it’s ripping!! There must be news, but I don’t see anything (furiously searching Google, Yahoo stock board, and CNBC). I KNEW I shouldn’t have sold this thing. Son of a…(and then maybe pound the desk a few times or have a good cry like I do when a trade goes bad)
People, people, people. It doesn’t have to be like that.
If you open your brokerage account and see the ABCR in it, and this ABCR has a price beside of it, as in it has value, there is a market for it, and it trades just like a stock, guess what, you can sell it. If you don’t know what it is, and don’t care, just take the free $1,000 and have an extra G&T, maybe after buying a nice bottle of Hendrick’s, after work that night. (Now, there may not be a price associated with your ABCR in which case it is “non-transferable,” or you can’t sell it. I don’t really feel like going into the differences this early on a Friday, but suffice it to say 1. You can exercise it and buy more ABC, or not, and 2. Your ABC will likely go down in the same manner I’m about to describe below.)
Now, if you actually want to try to make a little money off of this rights offering Wall Street mumbo jumbo thingy, listen up. There is a pattern that these rights things and warrant things follow. Do they follow this pattern every time? Nope, nada, nein. But, they follow it the majority of the time, and you can pick up some extra cash if you play along.
If you didn’t get the pattern from my little ditty above, I’ll lay it out very simply for you right here. Rights offering is announced and stock drops a little. Next 3-4 weeks, however long the offering is in place, the stock trends down (it’s a very old principle involving supply and demand that even The Bernanke can’t change).
Does it have up and down days during this time? Yep. But the trend is down. Does the stock announce BIG NEWS during this 3-4 week period to prop up the price? Hells to the no, radio silence, some sort of SEC / Hunger Games rule. The final few days of the rights offering the volume usually jumps and the stock may, or may not, be close to the strike price of the offering, but it’s usually down a decent amount from where it was 30 days ago.
And finally, just after the offering expires, maybe the next day, maybe in the next week, the clouds part and cherubs sing and maybe a trumpet is heard in the distance, and holy cow the price starts moving back up. It may even jump considerably, say 5-10% in just a few days.
And that’s it. No magic, no hocus pocus, no “management is out to screw me,” no “those f’ing daytraders are killing my stock.” It’s just a pattern, based on supply and demand. And it plays out over and over and over in the markets.
There are lots of them out there, these patterns, these non-mystical, non-“the big money is out to get me,” patterns. Find some patterns and go make some money.
Do you have a pattern you like to trade? Tell us about it below.