How the stock market works

Introduction| Course| Q&As | Recommended reading| Quiz | 102

11. Rights issues

Companies have rights issues when they want to raise more money on the stock market. Rather than take on corporate borrowings, they offer to sell new shares at a stated price, usually below their current share price to make them attractive.

Typically, a rights issue is expressed as 'one for nine' or 'one for six'. What this means is for every nine (or six) shares you already own, the company will offer you one more at the special price. You can sell the rights (or even allow them to lapse) rather than take them up, but if you don't take them up your shareholding in the company will be diluted (because new shares are being issued).

The standard advice to investors not sure whether to take up a rights issue is to sell enough of the entitlement to finance the purchase of the remainder.

Example

• Shares in Company A are trading at £10 and you own 1,000 of them
• The company has a one-for-ten rights issue, and sets the price of the new shares at £9.00
• Your entitlement is therefore to 100 new shares at £9.00 each
• If the entitlement to each new share is sellable at 50p, you can sell 93 of them, raise £46.50 and use that £46.50 to buy 5 of the new shares.

Note that the critical part of this operation is your ability to sell the entitlement to the rights issue itself. The only reason anyone would want to buy that entitlement is if the exercise price (£9.00) is below the current market price (£10.00).

1. Why do companies list on the Stock Exchange? 2. Offers for sale 3. Offers by tender, and other methods of admission 4. The Official List 5. AIM and OFEX 6. Different types of share 7. Reasons for market indices 8. The FTSE indices 9. Sectors 10. Scrip issues 11. Rights issues 12. Convertibles 13. Warrants 14. Share buybacks 15. Shareholder perks 16. Suspension 17. Insolvency 18. Conclusion

Recommend Reading

Click here for an example RNS announcement of a rights issue.

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