Rights issue can be a great issue to subscribe. These best trading strategies to make money in rights issue can be highly profitable.
Rights issue is a type of invitation to all existing shareholders of an underlying company. In this issue, a publicly listed company offers additional new shares to raise funds for its business purposes.
Some of the widely known business issue behinds rights issue include project expansion, debt reduction, funding acquisition targets, boosting working capital, strengthening balance sheets & many more.
When these business purposes are met successfully then the stock is likely to perform well in the market. However, if business purposes are not met successfully then the stock will disappoint everyone.
Therefore, it is always necessary to remain cautious in underlying stock. Finally, no single strategy works in every scenario.
Thus, investors & traders should plan strategies to tackle stock volatility before & after rights issue. Here are 6 different investment or trading strategies to deal with rights issue of a company:
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(1) Buy On Cum-Rights Basis & Sell On Ex-Rights
It is one of the oldest yet best trading strategies to make money in rights issue. Cum rights, also known as “with” rights, is a term used to describe a stock whose buyer is entitled to subscribe to a forthcoming rights issue.
The shareholders who own the stock of an underlying company that have cum rights are able to buy additional new shares, typically at a discounted price as compared to market price.
Several investors or traders prefer to buy shares of promising companies bringing rights issue during this period. It helps them to buy additional new shares at a huge discounted price.
On the other hand, ex-rights is a term used to describe a stock which is trading but no longer have rights attached with it. It is perhaps due to expiration of rights, or it has been transferred to another investor, or it has been exercised.
This period is often marked by profit booking from short-term traders. This strategy was once highly popular among traders would not yield significant returns except few cases.
Thus, shareholders should try to adopt this trading strategy in rights issue of fundamentally strong companies only.
- Best Trading Strategies To Make Money In Rights Issue: Shutterstock