30 SECOND GUIDE TO ...

RIGHTS ISSUES

What is a rights issue?

WHen companies want to raise capital, one way to do this is by a rights issue. This means issuing new shares and giving existing investors the right to buy them, usually at a discount. The size of the discount depends on how badly the firm needs to raise cash.

Is it a bad sign?

RIGHTS issues often happen when firms are in financial trouble, though they are sometimes used to help fund expansion. How do they work?

InVeSToRS can exercise their right to buy the cut-price shares – offered in proportion to their stake (for instance, one for every four shares held). If investors do not want to buy more shares in the rights issue, they can opt to do nothing, or they can sell their rights in the market.

What if you don’t take up the rights?

yoUR stake will be diluted, because there are now more shares in issue, so you hold a smaller proportion. The share price may fall on news of a rights issue, particularly if investors perceive it as a sign of financial difficulty.

Should shareholders support a rights issue?

IT depends – but private investors should always be careful. A successful rights issue can significantly improve the finances of a company, but the risk is that shareholders end up throwing good money after bad.