Experts >> subdivision and right issue pls explain ??

Why Do Companies Conduct Rights Issue?

First of all, let us establish the definition of rights issue. Rights issue involves shares being offered to existing shareholders at a discount to the current trading price, for the purpose of raising funds for the company. In other words, we can say that rights issue gives shareholders a chance to increase their exposure to the stock at a discounted price.

Rights issue is a way for companies to raise capital. Capital is raised when investors pay for the new shares that are being issued. Companies can use the raised capital to acquire assets, make a take-over, repay debts or save themselves from bankruptcies. Of course, a company can raise capital by other ways, such as borrowing from banks or issuing bonds. However, there can be times where the banks may be reluctant to lend, especially if the company is not doing well. In addition, high interest rate incurred by loans or the issuance of bonds may also force a company to raise capital through rights issue offering.

One must understand that rights issue will cause a company's net profit to spread over a larger number of shares. In other words, a company's earnings per share will decrease as earnings allocated to each ordinary share an investor has invested in will be diluted. Rights issue will also cause significant changes to the company's cash flow. However, one must also understand that capital raised through rights issue can further strengthen the company's balance sheet and allow it to pursue strategic opportunities in core markets.

Therefore, investors need to make an investment decision as to whether or not they want to take up the rights issue. There are basically 3 options an investor can take.

The 1st option is to take up the rights issue in full.

Another option you can take is to ignore the rights issue totally. But this option is not wise.

The last option is to sell your rights to others.

Understanding a Stock Split

We are going to cover what it means if a stock splits. There are two different kinds of splits and you need to know what they are if you plan on investing and owning stocks. They can be used to your advantage or to your disadvantage.

Companies who you own shares in can decide to change the number of shares they have in the market by doubling the number of shares, called a stock split, or they can reduce the number of shares, called a reverse split. Some people believe in splitting stocks and some don’t. Take Warren Buffet for example who owns Berkshire Hathaway, who has never allowed his stock to split. It has been above $10,000 a share now for quite some time and he still refuses to split the stock. The good side to this is that only wealthy investors can afford to invest in his company.

The most common reason that companies split their stocks are to manipulate the price of the stock. If the price of the stock goes to high, then some investors might not trade because of the amount of capital tied up in that stock. The volume of stock that has become to high has sometimes fallen due to investors not trading the stock. Each company is different, so there is no one formula that will tell you if or when it will happen.

If the price of a share of stock gets to low, that can hurt the stock. If you fall below a certain price for a certain amount of time, then the Stock Exchange can delist the stock, meaning they can take it off of the exchange from being traded. Some companies will use a reverse split in this situation to up the cost of their stock. Meaning if they were to do a one for three reverse split, then if the stock is going for 0.75, then the new price of one share would be 2.25. This way they up the value of the stock and run less chance of getting delisted.

amilaela wrote:thanks lot Ranga.. could u please explain with some example for right issue and sub division ?

duke wrote:Important things to note:

Subdivision / split
This is like instead of getting a Rs. 100 note you get it in Rs. 10 notes (10 of them). The value is the same.
But when it happens Sri Lankans think like this.
Wow, 10 stocks instead of 1. And one stock costs Rs. 200 so that means I will get 10 X 200 = Rs. 2000.
So the stock price goes up and up. Big players pump the price. They knew it was going to happen before so they buy at the ordinary price and sell to the new investors at Rs. 1000. The investors buy them thinking it will be Rs. 2000 soon so grab it as fast as they can. Stock goes up. Big players exit. Investors end up with shares paying 1000 for 200 worth shares.
Then share price will slowly come down and sometimes stagnate at those high prices. Can't go up because it's already too expensive and can't come down because from the investors have paid Rs. 2000 for this 'fundamental' share.

Will write about rights later. Similar story. Got to go. Please don't let others fall into holes where you're trapped.

slstock wrote:

duke wrote:Important things to note:

Subdivision / split
This is like instead of getting a Rs. 100 note you get it in Rs. 10 notes (10 of them). The value is the same.
But when it happens Sri Lankans think like this.
Wow, 10 stocks instead of 1. And one stock costs Rs. 200 so that means I will get 10 X 200 = Rs. 2000.
So the stock price goes up and up. Big players pump the price. They knew it was going to happen before so they buy at the ordinary price and sell to the new investors at Rs. 1000. The investors buy them thinking it will be Rs. 2000 soon so grab it as fast as they can. Stock goes up. Big players exit. Investors end up with shares paying 1000 for 200 worth shares.
Then share price will slowly come down and sometimes stagnate at those high prices. Can't go up because it's already too expensive and can't come down because from the investors have paid Rs. 2000 for this 'fundamental' share.

Will write about rights later. Similar story. Got to go. Please don't let others fall into holes where you're trapped.

Please do not count me as an expert as in my mind I am far from it. This is just an observation.



Yes what Duke is saying is true.

After a split announcement there should be no real reason for some company's price to go up ( if they are fairly valued in the market to their intrinsic value already ) .But people can pay games with the split as duke mentioned.

Some Exception and thigns to note :

1) One exception that might happen is that when a high valued and rather illiquid stock which is stagnating now due to big prices per share announces a split, there might be a possibility of price appreciation ( before or after split) with the hope there are more stocks of that company in the market after split and retailers now can purchase shares at an affordable price. Ex : What might happen to DIMO is they announce split.

2) This could also go the other way easily if such a share is already over priced in the market. LOLC was trading around Rs 1300-1400 before split ( 10:1 split I think). Now look at the price. SPEN was trading around Rs 3000 before 15:1 split. Now look at the price.

3) MORI share price was an exception. It initially went up due to news but before the split is came down drastically. ( due to abeydeera Inv selling I think). Interesting to see what will happen to MORI after the split.


4) Also too big of a split can be damaging as it can improve liquidity too much. RICH made a bad decision for 15:1 spilt when it share price was around RS 170-180. Mal also did the same with 10:1.

rijayasooriya wrote:
I like to add another exception using what has happened to WAPO.If I remember correctly with spliting they offered a very attractive right issue.(Price increase most probably due to right issue)

aj wrote:

rijayasooriya wrote:
I like to add another exception using what has happened to WAPO.If I remember correctly with spliting they offered a very attractive right issue.(Price increase most probably due to right issue)

Could you explain why it was attractive?