How rights issues work - stocks and shares
Discussion
steve..steve said:
1. Accept the rights and cough up more investment money,
2. Sell some or all the rights or
3. do nothing.
The only option that would have made some money would have been (2) selling the rights when they were in the money.2. Sell some or all the rights or
3. do nothing.
That is, selling them any time the SPM IM stock price was above €0.36, while the rights were trading.
The high was €0.63 on the day the rights started trading, which put the rights at €0.27 in value each.
A week later they were worth about €0.21 each and then a week later €0.03.
So i dont understand why my broker didnt sell the rights as soon as the rights started trading? I appreciate i didnt tell them to but from what i understand, by not responding to them automatically means i want to sell the rights. Why did they wait until the trading closed? Should there be an auditable trail someone opening up file and considering the sale of my rights?
The reason I ask is because I have had problems with them before. I have other euro shares and set up my dividends to be reinvested but the dividends were credited to my cash account. I called them up and queried it. they werent sure why and told me its probably because they are not geared up for foreign markets. I suspect the saipem rights sale was overlooked and I've ended up losing out.
Needless to say I'm changing broker. Broker is Halifax by the way so here's a warning to others who want to trade euro stocks.
The reason I ask is because I have had problems with them before. I have other euro shares and set up my dividends to be reinvested but the dividends were credited to my cash account. I called them up and queried it. they werent sure why and told me its probably because they are not geared up for foreign markets. I suspect the saipem rights sale was overlooked and I've ended up losing out.
Needless to say I'm changing broker. Broker is Halifax by the way so here's a warning to others who want to trade euro stocks.
It's standard to let the rights lapse rather than take it on themselves to pick a random moment to sell the rights.
(Note that lapsing doesn't usually mean worthless - that's very rare but did happen in this case.)
For example, if the SPM share price had gone UP over the rights period you would have been super pissed that they sold at the beginning without an instruction from you.
Essentially for the whole period the rights are trading - YOU have the ability to call them up and place a sell order.
They can't do that for you.
However, from the two guys (including you) on here who actually owned these rights it does look like the brokers make it incredibly difficult/impossible to MAKE THAT TRADE!
Which is really very poor.
Anyway - at the end what normally happens is that (say for example SPM was trading at E0.55 and the rights were E0.36):
- For you to exercise the rights you NEED TO PAY E0.36 per right and in return you get a share in new (post rights) SPM. (This is called subscribing to the rights.)
- The broker can't magic up that money for you.
(Quite often what people do is something called "tail swallowing" where they sell their ORDINARY shares in order to raise funds which they then use to exercise the rights, rather than ploughing new money into it. That way they maintain their financial exposure to the company.)
So at expiry since you haven't given the broker the instruction to exercise the rights and you don't have the funds to do so anyway, the broker gives the rights to an underwriting bank.
That bank then pays E0.36 TO SAIPEM for each right and ends up with a share worth E0.55 which it then sells in the open market on your behalf and sends you the proceeds (E0.19 per right).
The problem is that when the actual share price of SPM drops below E0.36 (as happened) the rights become worthless so the broker and bank don't have to do anything, they just expire.
This is a good summary: http://www.iii.co.uk/tools-research/knowledge-cent...
Article:
If a company you are investing in has a rights issue, you have four main options:
1. Subscribe for the new shares, which means you have to invest more money in the company.
2. Do nothing and let your rights lapse, although you should be aware that by doing so you will be diluting your stake in the company, including your entitlement to future dividend payments. If you do this, your rights will be offered for sale to other investors and you will be sent any proceeds by the company's share registrar.
3. Sell your rights to take up the shares in the market. The company's registrar may offer this service as part of the rights issue process.
A combination of 1 and 3 under which you sell enough of your rights to finance the take-up of the remainder.
(Note that lapsing doesn't usually mean worthless - that's very rare but did happen in this case.)
For example, if the SPM share price had gone UP over the rights period you would have been super pissed that they sold at the beginning without an instruction from you.
Essentially for the whole period the rights are trading - YOU have the ability to call them up and place a sell order.
They can't do that for you.
However, from the two guys (including you) on here who actually owned these rights it does look like the brokers make it incredibly difficult/impossible to MAKE THAT TRADE!
Which is really very poor.
Anyway - at the end what normally happens is that (say for example SPM was trading at E0.55 and the rights were E0.36):
- For you to exercise the rights you NEED TO PAY E0.36 per right and in return you get a share in new (post rights) SPM. (This is called subscribing to the rights.)
- The broker can't magic up that money for you.
(Quite often what people do is something called "tail swallowing" where they sell their ORDINARY shares in order to raise funds which they then use to exercise the rights, rather than ploughing new money into it. That way they maintain their financial exposure to the company.)
So at expiry since you haven't given the broker the instruction to exercise the rights and you don't have the funds to do so anyway, the broker gives the rights to an underwriting bank.
That bank then pays E0.36 TO SAIPEM for each right and ends up with a share worth E0.55 which it then sells in the open market on your behalf and sends you the proceeds (E0.19 per right).
The problem is that when the actual share price of SPM drops below E0.36 (as happened) the rights become worthless so the broker and bank don't have to do anything, they just expire.
This is a good summary: http://www.iii.co.uk/tools-research/knowledge-cent...
Article:
If a company you are investing in has a rights issue, you have four main options:
1. Subscribe for the new shares, which means you have to invest more money in the company.
2. Do nothing and let your rights lapse, although you should be aware that by doing so you will be diluting your stake in the company, including your entitlement to future dividend payments. If you do this, your rights will be offered for sale to other investors and you will be sent any proceeds by the company's share registrar.
3. Sell your rights to take up the shares in the market. The company's registrar may offer this service as part of the rights issue process.
A combination of 1 and 3 under which you sell enough of your rights to finance the take-up of the remainder.
As Walm said, your responsibility re rights. If the broker had exercised and this subsequently was found to be disadvantageous you'd be on here complaining about that! (Typical PI)
Only minor correction is that 'tail swallowing' does not involve selling ordinary shares. It is the process of selling a proportion of the rights to take up the remaining rights.
Only minor correction is that 'tail swallowing' does not involve selling ordinary shares. It is the process of selling a proportion of the rights to take up the remaining rights.
Edited by DoubleSix on Wednesday 25th May 19:23
DoubleSix said:
Only minor correction is that 'tail swallowing' does not involve selling ordinary shares. It is the process of selling a proportion of the rightsto take up the remaining rights.
Sorry - you are absolutely right.Although in effect it is the same thing!
(I have been so burned in the past by tail-swallowing technical pressure on both ords and rights!)
Gassing Station | Finance | Top of Page | What's New | My Stuff