Hi guys,
I have a question regarding rights issue.
If a company issues rights to buy stock at say $4.00 and the stock price on the market is $12. Does that mean I can buy a thousand shares at $4.00 and then sell them instantly on the open markets for $12?
Thank you
Basically yes.
But you have to wait till the stock has been allocated to you before you can sell it. There usually is a gap of one or two weeks between Close of "application" (i.e. the deadline for your money being received) and issue of new shares.
Rights are nearly always issued to holders of the relevant shares.
Take DYE for example: You had to own DYE at the "Record Date" which was sometime in February, from memory. Then you had the right to apply for up to $15,000 worth of shares at a price of 16.6cps, payable by 31st of May. In early May, the share price rose on the open market to 30, 40, up to 56c. So everybody and his dog would've wanted to join in. (No secret that I did too.)
But here's the catch: Due to the massive oversubscription, the individual allotment was scaled back to 17.8% of what each had applied for, and that was only announced a few days into June. You also received your small parcel in mid-June, and I'm still waiting for a refund cheque returning the 82.2% of my application monies.
So, had you applied for 80,000 new shares and tried to sell them in mid-May, you'd be in a pickle.
But had you been short of cash to exercise the rights, you could have sold just enough existing shares to cover the cost of the new ones.