Rights issues: the company wants more money
A rights issue is not free money. It is a request for more money, and if you decline you are diluted.
Decide what to do with the letter, rather than ignoring it.
How Rights issues: the company wants more money works, in one picture
The same argument as the text, as a chain. Each step is what makes the next one possible.
What you actually own
A share is a slice of the whole company: its profits, its assets and its votes. Your slice is small, and it is a real claim, not a bet on a ticker.
- 1
The company is raising cash from its existing owners
You are offered the right to buy new shares, usually at a meaningful discount to the market price, in proportion to what you already hold. The discount is what makes people feel they are being given something.
- 2
The discount is an illusion, and the maths says so
New shares issued below the market price drag the price down towards a blended level. If you take up your rights in full, you end up roughly where you started, with more shares at a lower price. Nothing has been given to you.
- 3
Doing nothing is the one choice that definitely loses
If you neither take up the rights nor sell them, your slice shrinks and you receive no compensation for it. The rights themselves usually have value and can be sold, which at least converts the dilution into cash.
The worst outcome in a rights issue is inaction, and inaction is what most retail holders choose, because the letter looked like admin.
- 4
The real question is why they need the money
To fund an acquisition or an opportunity is one story. To repair a balance sheet that cannot service its debt is a completely different one, and it usually will not be the last such request.
You know whether the money is for growth or for survival, and you can say how you know.
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A rights issue is not free money. It is a request for more money, and if you decline you are diluted.
Every one shows its exact method, and the circumstances in which it is wrong. Free, and no account to look.