Stock markets 101: The ins and outs of rights issues and discounted offerings

Julie Brownlee, Fsp Invest, 29 Jun. 2015

Tags: stock market, rights issues, discounted offerings, what is a rights issue, what is a discounted offering

One of the main reasons why companies list on the stock market is to raise money. Initially companies do this by selling shares in their business.

Once a company has a listing, it can also raise money in the future by issuing more shares.

Companies do this through rights issues. Rights issues can lead to discounted offerings.

Read on to find out exactly what this means for you as a shareholder…

How companies raise money on the stock market

Once a company has a listing on the stock market, it makes it much easier for it to raise funds. It does this by issuing new shares.

One of the most common ways a company issues new shares is through a rights issue. Shareholders who already own shares in the company receive the right to buy new shares in proportion to their existing shareholding.

For example, Mark is a shareholder in Company ABC. If Mark received a two-for-one rights issue from Company ABC, he has the right to buy two new shares for each share he already owns.

Shareholders don’t have to buy these extra shares. They may not want to or don’t have the funds available to buy more shares. But these rights still have a value.

So a shareholder can decide to sell all or some of his rights. This is selling the rights ‘nil paid’ because the shareholder hasn’t paid anything for them.

Where discounted offerings come into rights issues

The price of rights is usually at a discount to the current share price. This lower price is in a bid to encourage shareholders to take up their rights.

The discount usually depends on how difficult it is for a company to raise money.

If the discount was large, or deeply discounted, it suggests the company is in need of new funds to pay off debt and is struggling for cash.

If the discount is small, it suggests the company is in good financial health with a strong balance sheet. It may be raising funds for an acquisition.

So there you have it. The ins and outs of rights issues and discounted offerings.

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