Whenever a company announces that it is making a rights issue, the market in Malaysia/Singapore, on the whole, does not react adversely especially when the right issues are accompanied by a bonus issue.
- The price of the company's shares usually moves up and seldom does one come across cases where rights are badly undersubscribed.
In Britain and more in particular, the US, the market seldom reacts so kindly to rights issues.
- Most rights issues are treated with great suspicion.
- The market usually takes a "wait and see" attitude and will only react favourably if it is convinced that the new capital obtained from the rights issue is put to good use and that the profit of the company can increase as a result of the rights issue.
- In fact, the market in the US is so suspicious of rights issues that it is most unusual for a large US corporation to make a right issue.
Though not all rights are automatically bad, local investors could do with a good dose of cynicism and ought to treat rights issues with a bit more suspicion.
- Local investors ought to be aware of the fact that not all rights issues are the same.
- Each rights issue should be treated on its own merit and if it is truly good, then there is a case for bidding up the price of the shares and taking up the rights issues.
If we blindly follow the market without knowledge what we are doing, we can so easily be taken advantage of.
- Opportunists, insiders and rumour-mongers are abound in the local market.
- Here, as with everywhere else, Caveat Emptor (Latin for "let the buyer beware") is the key.
In order to understand why the Western investors are so suspicious of rights, we must go back to the first principle and try to understand:
- what is so bad about a right issue and
- the reason a company has for making a rights issue.
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