The material on this website is for information only
and is not intended as any recommendation or endorsement of any products or companies mentioned. We are not licensed by the FSA to give financial advice, and none of the material on this website constitutes or is intended to constitute financial ...
News
ChronicleLiveSunderland son spared jail after fleecing grandmother and dad out of thousands ...ChronicleLiveA son has been spared prison after fleecing his family out of more than £6,000 to feed his gambling habit. Paul Lewis stole money from his elderly grandmother as well as using his dad's account to apply for loans and pay off a credit card. The 33-year ...
Financial TimesIsa deposits swell £20bn in a yearFinancial Times... by the chancellor. The amount of money saved within the tax-free savings accounts has increased to record levels, rising by more than £20bn to £79bn in total, according to data released on Friday by HMRC. ... “Next year, basic rate taxpayers may be ...and more »
Virgin Money chief Jayne-Anne Gadhia targets banks' 'oligopoly'Financial TimesShe has strong views on the need to shake up the British market — or “to get rid of the bollocks in banking”, as she put it in a blog post this year when launching a Virgin Money Sex Pistols-themed credit card. “Current accounts are skewed in favour ...
Express.co.ukStart saving £28 a week NOW to have enough cash for ChristmasExpress.co.ukShould you use pension savings to pay off your mortgage? Savers' protection from banks going ... “Christmas can put real pressure on people's finances, but putting money aside each month can really help to spread the cost. If you can afford to save ...and more »
This is MoneyHSBC payments collapse sees thousands go into Bank Holiday without salariesThis is MoneyIt's typically used for making regular payments such as salaries, pensions, state benefits and tax credits - almost 90 per cent of the UK workforce are paid using Bacs direct credit, figures show. More than 150,000 UK organisations currently use it ...and more »
Have you met...
Latest Members:


ganool168


Noiajf


mone


AGreen


madashell


Fraser


elhadi

 

Extra Shares - to buy or njot to buy?

Extra Shares – to buy or not to buy?  


Many of you will have been given the opportunity to buy extra shares in your banks recently as they attempt to raise extra cash. Should you take them up on their offers? Moneyagonyaunt finance expert John Eaton  of Lupton Fawcett in Leeds has (what he calls) a typical solicitor’s answer!


When companies need to raise more money, but don't necessarily want to borrow more, they often do declare a "Rights Issue"; This is simply an offer of further shares to the existing shareholders in proportion to their existing shareholdings, and (usually) on favourable terms - e.g. the right for them to acquire one further share for, say, every three they already hold, and at a discounted price - i.e. one which is below the current market price. From the Company's point of view, this is a cheap and convenient way of raising further funds. From the shareholder's point of view, this could be an attractive "top up" investment opportunity.  


So, should you take up the rights which are provisionally allotted to you? Generally speaking, the answer will usually be "yes" - for three reasons:
1. Rights Issues represent a very cheap (nil cost - you can't get cheaper than that!) way of acquiring more shares in a Company in which you are already a shareholder
2. A rights issue usually offers an immediate capital profit, since the Offer price is usually much lower than the current market value - i.e. the shares are available at a discount
3. Taking up the shares avoids "diluting" your stake in the Company - if you hold say 1% of the Company, but did not take up the rights, your percentage holding would then fall below 1%. By taking up the rights, you preserve your shareholding at 1% of the Company. (In practice, this doesn't really have any significance, as a private shareholder's stake will usually be too small for this to make any difference anyway).


However, those three reasons should all be looked at in the light of the one fundamental question - if you had cash, but no shares in the Company, would you now go out and buy shares in this Company, in the light of its future prospects? If you wouldn't buy the shares today, then (a) why are you still holding them at all?! and (b) why would you want to buy more shares in a Company which you don't regard as "a buy"?! ( An obvious but painfully necessary question!). A clue can be found in answering the question "Why is the Company having a Rights issue in the first place?" If it is for a good commercial reason - to expand, to take over another Company, to buy a new business or develop a Patent, or invest in new technology, or even to reduce a particular debt - then, fine - it is probably worth supporting. But if the rationale is simply to bolster the Company's Balance Sheet, and if the Company's future prospects are not that impressive, then why risk "throwing good money after bad"?


For example, in the Banking Sector (where there have been a few Rights issues recently), the "downside" is pretty obvious - in particular, the unquantifiable cost of all those unserviceable loans and toxic debts - and therefore the risk that the Company will need more "rescue cash" - or will end up being nationalised entirely, at some future stage. If you're cautious, or pessimistic about the future, then I would leave the Company to sell the rights, and pick up the premium which they would obtain for you. Logically, you would also sell your other shares in the Bank, at the same time.

 
However, if you're happy to take a punt on the future of the Company (which is what you would be doing) then take up the rights - especially if the amount at stake is one which you could afford to lose, if everything went pear-shaped - and simply keep your fingers crossed, that things work out well for the Bank - which they might or might not do!

Advertise with us  |  Privacy  |  Terms & Copyright                                                                                     Website maintained by USP Networks