If you want to add more stocks of a company that you already have in your portfolio, a rights is sue could be a great way to do just that at a discount. Read on to find out more.
1. What is a rights issue?
In a rights issue, companies issue shares to its ex isting shareholders within a specific period.The shares are issued at a price below the market levels.
2. Why do companies come up with rights issues?
When companies accumulate profits and re serves and want to re ward their existing shareholders, they do it through stock dividends or through rights issues. A rights issue al lows the company to raise funds and also lets existing shareholders to increase their stakes.
3. What options do investors have during a rights issue?
Investors can either subscribe to the rights issue in full or ignore the of nore the offer. They can also transfer the rights to someone else. However, this is not applicable in all cases as some rights are not transferable.
4. What factors must investors look at before taking up the rights issue offer?
Investors should look at the price of the stock at the cur rent value and if it is trading at a significant discount to its intrinsic value. Only if it is at a discount to the intrinsic value, should an investor buy .
5. Is discount the only criteria?
A rights issue can often be very tempting but investors should check their risk profile.Only if additional stocks of the company work well for their portfolio should they opt for a rights issue.Otherwise, they should either hold on to their existing stocks or exit.Investors should understand why the company is taking up the rights issue and what the recovery plan is. "A company can also use a rights issue to check problems on their balance sheets. Investors should be cautious of that before opting for a rights issue
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