Rights issue may not attract every investor. These reasons why small investors stay away from rights issue can help you to understand it better.
Rights issue is a form of invitation to existing shareholders for making cash contribution in return of additional new shares of the company. These additional new shares are usually offered at a reasonable discount to make the issue successful.
But, still a large number of small & big investors usually dislike a rights issue for a number of reasons. They ignore a rights issue even when it is being offered at a discount to existing shareholders only rather than all types of investors. Here are 10 reasons why retail investors refrain from rights issue:
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(1) Possibility Of Share Price Fall Soon After The Issue
It is one of the most common reasons why small investors stay away from rights issue. Any issue that is meant to offer additional new shares to its investors is likely to dilute earnings per share.
Right issue is not a different thing in this regard. It dilutes the earnings per share of underlying company.
Additionally, it also dilutes existing stake of existing shareholders, if they don’t exercise their rights to purchase new shares. Due to this possibility of earnings dilution, the share price of underlying company takes a nosedive to certain extent.
This common form of stock behavior post rights issue often makes small investors to feel afraid of subscribing to rights issue. Therefore, they prefer to stay away from such issues.
However, if the main objective behind the issue is business-friendly for the company then price fall post rights issue may be negligible.
- Reasons Why Small Investors Stay Away From Rights Issue: Shutterstock