Rights Issue

A rights issue is a company creating new shares and selling them for cash. Unlike bank borrowing, the money comes from shareholders and carries no obligation to repay.

Existing shareholders face dilution. More shares outstanding means each holding represents a smaller proportion, which is why share prices often fall when an issue is announced.

What the money is for decides the verdict. Funding a new plant or a promising venture can benefit shareholders long term; raising cash to repay debt or cover a shortfall in working capital is a poor sign.

Who receives the shares matters too. Offering existing holders priority differs from a placement directed at specific investors, and the latter often accompanies a change in control.

New shares are usually priced below the market, since otherwise nobody would buy. The larger that discount, the greater the loss to existing holders — so check both the price and the size of the issue.