Saturday, 4 June 2016

My thoughts on rights issuance

Rights issue = an issue of shares offered at a special price by a company to its existing shareholders in proportion to their holding of old shares.

When I think of rights, I think of share dilution. More shares at cheap price for existing shareholders, some would scurry to sell off once they get hold of the rights share before the full dilution takes effect.

Not all rights are right to get. However, if you decided not to get then you might be better off selling away the shares instead of holding them (before full dilution takes place as mentioned). A few questions you can ask yourself before taking the leap of faith are - why is the company issuing rights? This in turn gives answer to what it would do with the money gathered. Most of the time it is for paying off debts. Fair enough. But what's next? How are they going to turn their business around? What data did you get your convictions from? How are you able to minimise your risk?

(From a bad past experience, when a company can't turn its business around fast enough, it's share price would plummet faster than one could finish swearing and starts to react. Plummeting could continue even after price dilution effect has taken place.)

To get or not to get? To jump or not to jump?


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5 comments:

  1. How much deep is the discount and then do the Maths?

    Throwing good money after bad money or paying one off premium to recover some bad money to reduce losses?

    ReplyDelete
    Replies
    1. Hmm... that depends on the nature of the business.
      Sometimes discount is hard to calculate because not all assets or services of a company can be valued meaningfully.

      Delete
    2. Aiyo. Discount to last market closing price and discount to ex right theoretical price.

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    3. I see. So the discount probably can help to break even or buffer some loss (depending on how high you bought the shares initially for).

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  2. You are right, be very, very careful about rights issue.
    So far my experiences were more positive than negative.
    One very memorable one was i subscribed(very risky action) to market rejected "nil paid rights".
    i had no holding at all.
    And it's not a blue chip, of course
    And i bought more than i intended.
    A very frightening speculating undertaking indeed!
    Fortunately for me it turned out i was right to take the risk against the market.
    Why did the market rejected the rights issue?
    Maybe it's not a blue chip or for whatever reasons, i really don't know.
    Will i do it again?
    Speculation ma!
    i don't know.

    ReplyDelete

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