A short guide to share issues
From time to time, growth companies and start-ups needs funding. There are a number of paths to go: bank loan, private placements – or simply ask the current shareholders for more money in a preferential rights issue. Short: a share issue.
In this short guide to share issues I will give you the fundamentals.
Why share issues
Share issues allows the investors to keep their relative ownership of the company. Therefore, If I before the issue own 0.05 % of the (shares in the) company, using my right and buying new shares, will allow me to remain owner of 0.05 % of the shares. Of course, the number of shares I hold has increased.
As I invest in Swedish growth shares, I encounter from time to time the companies asks for more money and issue new shares. Growth companies need money to grow, lots of money, and ‘loaning’ the money from the owners do not affect the profits, as will interests from a bank loan.
The effect on share price
It is useful to know that often share issues affects the share price in the short term when a share issue. The share price tend to fall to right above the prise at the share issue. If the current share price is 14 SEK and the issue price is 10 SEK, often the share price will fall to 10.25 or 10.5. I, myself, often take this as an opportunity to pick up a share at a cheap price.
At share issues, shares are first offered to the current shareholders (the preferential right), secondly to other investors. If interested in the share issue, it is often a good idea to buy shares to get the rights. There is a date to observe, since at one day you buy the shares with the rights and the next without. The rights are, so to speak, ‘peeled’ of the share on that date and you can trade them at the market.
What you have to do
In advance of the issuing period (often 2 weeks), the current shareowners will receive a prospect or a memorandum and an order form. If you want to buy shares, you fill out the order form. If you have no current owner rights to back your order, the chance is that you will get only a tiny number of shares. At one point, I was ‘lucky’ to get 219 shares at a price of app. 3 SEK! The cost of making an international payment almost exceeded the price of the shares!
After you bought the new shares, you will receive an equal number of temporary shares, called BTAs. For a shorter period, both BTAs and shares are traded – with an almost equal price. In my share account, I can observe first the rights come in as a new post, then the BTAs, and eventually the new shares.
The simple steps:
- Buy shares or rights in advance (optional)
- Read the memorandum and fill out the share order form
- Order the shares
- Pay in time (or somebody will be offered the shares)