By Jason Fittler
Companies can raise money many different ways; they have access to traditional methods like us, which is borrowing from banks. They can also borrow from investors like us through the use of preference shares, convertible notes and bonds. But one of the best ways that they can raise money is through the use of Share Purchase Plans or Rights Issues.
So how do these work?
Share Purchase Plan (SPP) – through a SPP a company will offer share holders more shares in the company at a price which is discounted to the current price. To do this the company will simply issue more shares. Typically the company will allow any shareholder to bid for between $2500 to $15,000 worth of shares. How much you apply for is up to each individual share holder. Under a SPP, you can be scaled back, meaning you get less shares then you initially applied.
Rights Issue – under a rights issue the company will allow you to purchase some many shares for each share you hold at a price discounted to the current market price. As this is a right you are not subject to a scale back, nor are you under any obligation to take up the shares. For example you may be entitled 1 for every 2 shares you hold in XYZ at a price of $5 per share. As such if you hold 100 shares in XYZ you are able to buy a further 50 shares at $5 per share.
Companies will undertake a right issue or SPP to raise capital for one of many activities including, paying out bank loans, purchase of assets or to recapitalise the company.
You need to be aware that if a company you hold stocks in is under taking a rights issue or SPP your holding will be diluted. As more share will be issued in the company so some action should be taken. As the shares are normally offered at a good discount to market price you have the option to take up the shares or sell some exiting shares and use the cash to take up the offer and pocket the surplus cash.
The important thing to note is that you need to take some sort of action, no action will mean that you will lose money.
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