A rights issue
takes place when a company wants to raise funds
from existing shareholders. Unlike dividends,
it is not a regular occurrence, but you should
be ready for it if it comes. The rights issue
gives you as an existing shareholder the right
to buy new shares at slightly less than the current
value of your existing shares, and without paying
a broker’s commission.
In a 1 for 2 rights issue, for example, you have
the right to buy one new share for every two that
you already hold. Alternatively, you can sell
your rights in the market, or let them lapse and
later receive a cheque from the company for the
cash received. Following completion of the rights
issue, the share price will even out at slightly
below that of your original shares.
Your online broker will inform you of any rights
issue for which you are eligible, and you can
register any interest by e-mail. But first find
out why the company wants the funding. If it is
for unwise expansion or another wrong reason,
steer clear. Should directors not take up a rights
issue, it is often wise to follow their example.
