Shares- Rights Issue- Good or Bad?

foreveramum

Hi folks,

We have shares in a company which has been doing well and the shares have increased to a level we are happy with. However the company are now planning a "rights issue" to raise funds. My question is what does this actually mean in terms of our investment please anyone? Do we sell or do we buy additional shares that become available. Will our existing shares go down or will we have rights to buy shares cheaper than market value? Is the company struggling or raising money away from banks/investment companies?

We are still learning about this type of investment and so taking a cautious step, so any help would be well received. Thanks in advance.

purch

It will depend entirely on the Stock and the circumstances.

Often a rights issue is ultimately the cheapest way for a company to raise Cash for investment and growth, which in the end is good for the stockholder who owns the company stock, and participated in the issue.

foreveramum

Thanks for this. The company say that if we do not take up the shares offered then our investment at this moment in time may fall by as much as 40% against the current price of 140p and the rights issue of 100p. So that I understand(I think!)

However on another stock we have this happened earlier in the year when they had a rights issue (which I did not understand and still am unsure hence me asking) but I was not offered any shares? The shares I had then fell by about 35% so why did I not get the chance to balance my shares with this other stock? Do they have to by law inform us or not becuase we did not receive any paperwork telling us about this and so feel we lost out quite alot of money.

sabretoothtigger

Yes they have to inform you but you wont always get rights. That sounds like an open offer


Its just another form of borrowing I think, its just more obvious to you then a bank loan I guess and your the 'bank' that is being asked to invest more money.

If the company gains 2bn in extra funds it shouldnt make it worth less and so the share price will reflect the new cash but also the new shares. Look at the market cap http://stockchallenge.co.uk/ftse.php

cloud_dog

foreveramum wrote: »

Hi folks,

We have shares in a company which has been doing well and the shares have increased to a level we are happy with. However the company are now planning a "rights issue" to raise funds. My question is what does this actually mean in terms of our investment please anyone? Do we sell or do we buy additional shares that become available. Will our existing shares go down or will we have rights to buy shares cheaper than market value? Is the company struggling or raising money away from banks/investment companies?

We are still learning about this type of investment and so taking a cautious step, so any help would be well received. Thanks in advance.

foreveramum, as others have said a rights issue is a way of a company raising cheap money, i.e. there isn't any interest to pay on the money raised (as in a bond issue to raise cash).

From a purely mathematical perspective if you take up your full entitlement a rights issue should neither be positive nor negative for a share price because more capital has been added to the company but an equal number of shares have been added, i.e. total value of the company divided by the number of shares in issue before and after the the rights issue should equal the same share price.

If you weren't to take up your full rights issue you effectively would be dilluting your investment bu that amount, i.e. if hte company was creating 20% more shares (in the rights issue) and you didn't take up any of them your share of the pie would be 20% smaller.

Hope that makes sense.

foreveramum

Cheers everyone,

I understand what you have said so I am happy!!