Right issue is one of the funding mechanisms that can be done by a company to increase its capital. Through a rights issue, companies can offer new shares to existing shareholders at a lower price than the current market price.
In this article, we will discuss in detail what a rights issue in stocks is, as well as the advantages and disadvantages of a right issue in stocks.
What is a Right Issue in Shares?
Right issue is an offer of shares issued by a company that has been listed on the stock exchange to existing shareholders. In a rights issue, the company offers new shares to existing shareholders at a lower price than the current market price.
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Existing shareholders have the right to buy new shares in a certain amount according to the number of shares they own. Right issues are usually carried out by companies that need additional capital to expand their business or other investments.
Gain Right Issue in Shares
Conducting a rights issue can provide several advantages for the company. Some of these advantages include:
1. Increasing Company Capital
One of the main advantages of a rights issue is that it can increase the company’s capital. By conducting a rights issue, the company can raise additional capital from existing shareholders.
This additional capital can be used to expand the business or other investments that can increase the company’s growth.
2. Increase the Liquidity of Shares
Besides being able to increase the company’s capital, the benefits of a rights issue can also increase stock liquidity. This happens because with the offer of new shares, existing shareholders have the opportunity to buy the new shares.
If existing shareholders buy the new shares, there will be an increase in the number of shares circulating in the market. This can increase the number of shares available for trading and increase the liquidity of the shares.
3. Increasing Company Value
In the long term, conducting a rights issue can also increase the value of the company. With the additional capital obtained from the rights issue, the company can expand its business or other investments that can increase the company’s growth.
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If the company’s growth increases, the value of the company will also increase.
Loss from Right Issue in Shares
Apart from the advantages, conducting a rights issue also has some disadvantages that need to be considered. Some of these losses include:
1. Stock Dilution Pen
One of the main disadvantages of a rights issue is stock dilution. Pen dilution of shares occurs when the number of shares outstanding in the market increases. This can result in existing shareholders having a lower percentage of ownership than before.
For example, if a shareholder owned 10% of the shares prior to the rights issue, then their percentage of ownership could decrease if they did not buy the new shares offered through the rights issue.
2. The occurrence of selling pressure
A rights issue can also result in selling pressure on the stock market. This occurs because existing shareholders have the right to buy new shares at a lower price than the current market price.
If the existing shareholders do not buy the new shares, then they can sell the shares they own on the stock market at a higher price than the exercise price. This can result in selling pressure on the stock market.
3. Changes in Share Value
Conducting a rights issue can also result in changes in the value of shares. If the number of shares circulating in the market increases, the demand for these shares will decrease.
This can result in decreased stock prices and decreased company value. If the company’s value drops, it can result in loss of investor confidence and reduce the company’s market value.
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How Rights Issues Work
The rights issue process begins when a company listed on the stock exchange issues a new share offer to existing shareholders.
The share offering is usually done by giving rights to existing shareholders to buy new shares at a lower price than the current market price. The lower price is known as the exercise price.
After the existing shareholders accept the offer, they have the right to buy new shares at the exercise price in a certain amount according to the number of shares they own.
The number of shares offered is usually in accordance with a certain ratio, for example 1 new share for every 5 shares already owned.
If existing shareholders decide to purchase the new shares, they must pay an exercise price according to the number of shares they purchased. After the purchase process is complete, the new shares will become the property of the existing shareholders.
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Requirements for Conducting a Right Issue
Before conducting a rights issue, the company must meet several requirements set by the stock exchange and regulatory authorities. Some of these requirements include:
- Setting a reasonable exercise price and not detrimental to existing shareholders.
- Submit rights issue proposals to regulators and obtain approval from regulators.
- Obtain approval from shareholders at the general meeting of shareholders.
Conducting a rights issue can be an alternative for companies that need additional capital to expand their business or other investments. In a rights issue, the company offers new shares to existing shareholders at a lower price than the current market price.
Conducting a rights issue can provide several benefits such as increasing company capital, increasing stock liquidity, and increasing company value. However, conducting a rights issue also has several disadvantages, such as stock dilution, selling pressure, and changes in share value.
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Therefore, before conducting a rights issue, the company must carefully consider the possible advantages and disadvantages.
Thus the article regarding information about rights issues in stocks. Hopefully the above article is useful, yes!