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Protect your investment from a rights issue.
08 Nov 2018 (64 views)

If your share is worth $2 and the company wants to give a 1 for 1 rights issue at $1, what should you do?

First, you must be aware that the share price, after the rights issue, will adust to $1.50. This is a theoretical price, assuming that there are no other factors affecting the share price. After the rights issue, you will own 2 shares worth $3 in total. This will put you in the same position as before the rights issue, i.e. $2 for your original share and $1 for the rights share.

If you do not take up the rights issue, you will lose $0.50, because the theoretical value of you share would have dropped from $2 to $1.50.

Who benefits from the loss that you have suffered? It could be the other shareholders who have subscribed for the rights not taken up. But it could be the directors of the company who have decided to distribute these unexercised rights among themselves. 

It is therefore important for you to take up the rights. 

What happens if you do not have the money to take up the rights? You can sell the rights in the market. The theoretical price of the rights should be $0.50 but the buyer may offer a lower price of say $0.40. It is better for you to sell your rights at this lower price, rather than to lose it entirely.

When can you sell the rights? When can you exercise to take up the rights?

The decision to issue the rights have to be passed at the shareholders' meeting. The dates of listing of the rights and exercising the rights would have been approved at that meeting. You should keep a note in your diary, so that you do not overlook to sell or take up your rights. You should not rely on the letter from the company, as you may overlook it.

 


Protect your investment from a rights issue.
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If your share is worth $2 and the company wants to give a 1 for 1 rights issue at $1, what should you do?

First, you must be aware that the share price, after the rights issue, will adust to $1.50. This is a theoretical price, assuming that there are no other factors affecting the share price. After the rights issue, you will own 2 shares worth $3 in total. This will put you in the same position as before the rights issue, i.e. $2 for your original share and $1 for the rights share.

If you do not take up the rights issue, you will lose $0.50, because the theoretical value of you share would have dropped from $2 to $1.50.

Who benefits from the loss that you have suffered? It could be the other shareholders who have subscribed for the rights not taken up. But it could be the directors of the company who have decided to distribute these unexercised rights among themselves. 

It is therefore important for you to take up the rights. 

What happens if you do not have the money to take up the rights? You can sell the rights in the market. The theoretical price of the rights should be $0.50 but the buyer may offer a lower price of say $0.40. It is better for you to sell your rights at this lower price, rather than to lose it entirely.

When can you sell the rights? When can you exercise to take up the rights?

The decision to issue the rights have to be passed at the shareholders' meeting. The dates of listing of the rights and exercising the rights would have been approved at that meeting. You should keep a note in your diary, so that you do not overlook to sell or take up your rights. You should not rely on the letter from the company, as you may overlook it.