Rights Issue – Example

Assume company XYZ has announced rights issue in the ratio of 5:2 (for every 5 shares additional 2 shares are offered). If you hold 100 shares of XYZ then you will be entitled to get 40 (100 * 2/5) new shares of XYZ. The new shares are usually given at deep discount price so that the full issue gets subscribed and the company may raise the required capital. A future date is fixed for this corporate action.

After this corporate action the share price comes down proportionate to the issue ratio, theoretically. Actual value differs from this theoretical value based on the intention of the funds’ raise.

Consider share price of XYZ is Rs 300 and the company is offering new shares at Rs 200 and you hold 100 shares of XYZ.

You can buy 40 shares at Rs 200. The amount required to buy new shares Rs 8000.
Value of the existing shares 300 * 100 = Rs 30,000
Total value of 140 shares = 30,000 + 8000 = Rs 38,000
Theoretical share price ex-rights = 38,000 / 140 = Rs 271.5 Read more

July 25, 2009 | Filed Under Stocks | Leave a Comment

What is Hedging? Let’s understand

Most of the investors never do hedging in share markets. However, it would be good to understand what is meant by hedging with some examples. After all, knowledge is wealth in this century, especially in finance industry.

In simple, Hedging is your mitigation plan to reduce risks. In someway, we can compare hedging with insurance but it is not exactly same. In Insurance, for example insurance against your property, you pay some premium to buy insurance and if something goes wrong with your property then economic value of that property will be paid back to you. That means with a little premium you are transferring almost entire risk to other party (insurance company). But in hedging we can reduce the risk with many limitations. Read more