Monday, September 7, 2009

What is Right Issue?

Some people might be confused with the term "Right Issue" by some of the company in the market. Personally, I was confused with "Right Issue" too and after reading books and asking my broker about "What is Stock Right?" and "How Stock Rights Works?", I finally understand "Right" and its usage.

If you are unsure about Right Issue of stock, then this post would be very helpful to help you understand it.I hope my explanation will be clear and easy to understand. Right Issue is where a company offer shareholders a special price to buy the stock (mother share) at much lower price than the market price. An issue of right is a great way to cost average the stock shareholders are holding.

Example:
Stock AAA issues right to the shareholders of 1:1 at RM1.00. This means that shareholders get 1 right for 1 share he/she is holding.

Let say:
Mr. A has 1000 units of stock of company AAA which he bought at RM2.00 per share. [RM2000 for 1000 units of shares]
After right issue, Mr will have 1000 unit of rights.

Now, it is up to Mr. A whether he wants to buy or sell the 1000 rights.

If he want to buy, so he has to pay:
RM1000 plus Fees [1000 units of rights x RM 1.00]

So, now Mr. A will have 2000 units of share of company AAA.

Cost average
= (initial cost + cost of right)/Total Units
= (RM2000 + RM1000)/2000
= RM1.50 per share

So,this will reduce the price of the initial investment cost of RM 2.00 per share. Now,the price per share becomes RM 1.50 per share.

If Mr. A wants to sell:
1000 units will be sold according to the price of the right in the market. Normally, the name of right in the market will have "-OR".So, right of stock AAA will be AAA-OR.

If the price of the AAA-OR in the market is RM1.20 per unit and Mr. A sell 1000 units. He will earn RM1200.00.

So, right issue is a good thing for shareholders because shareholders can cost average their stock or get cash by selling off their rights. Either way, the right issue benefit the shareholders.

Notice: Remember that right issue means the company is creating more shares in the market. So, normally after right issue, the price of the share will drop.

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