What should you know about the rights issue in stock trading?

Why would a company sell its shares?

Have you ever wondered why would a company decide to sell parts of his company’s shares to the general public? The answer is simple. The company needs capital to expand its operations or any other reasons. So, if a company needs money, it can issue shares of predetermined prices in the stock market. Individuals can buy these shares either a little or in large quantities by paying the price per stock. The amount will go to the company if the stocks are new. Some investors will buy shares from other investors in the market. It is the process of reselling of shares in which the investor can sell his shares to another person. At the time of selling, the seller will get the amount from the buyer, and he can use it for personal purposes. Usually, people will see the shares if the stock price is high and will wish to buy stocks when the price is low. Apart from these shares, there are some other types of issuance in which the company will appreciate the existing shareholders to buy new shares. This process is known as a rights issue. In this article, we will discuss the rights issue in brief. 

What is a Rights issue?

Companies may get into financial troubles where they will not have funds to tackle the situations. These cases may be anything like company expansion, repay debts, meet acquisition costs, or enrich capital. In these times, the company will issue new shares and ask its existing shareholders to buy them, thus raising the funds. The difference from ordinary share issuance is that the company will provide rights to the existing stakeholders with which they can buy the new stocks for a price lower than the original share price. The discount on stock price is to attract the current shareholders to buy more new shares to meet the capital requirement of the company. The original stock price in the market is known as the offering price, and the discounted price in the case of the rights issue is known as supply price. There will be a small fee for registering for the rights issue and some charges for exercising the rights. 

What are the types of rights issues?

The rights issue is of two types, one with the same name (rights issue) and the other as an open offer. You can buy and sell rights issue stocks in the market, but you cannot buy and sell stocks in the market in the case of an open offer. 

What is the flip side of the rights issue for the company?

A company can raise capital for its short term need through a rights issue. But the inclusion of more new shares into the market will dilute the stock price, and it will go down further. The offering of rights will moderate the company’s net profit over several shares. So, the company’s earnings per share will also decrease.