Sunday, 27 September 2009

Some rights issues are good, others can be very bad

Like most things in investment, rights issues are not simple matters.

Rights are not automatically "good things" from the shareholders' point of view.  Some of the rights are good, others can be very bad. 

Investors have to be careful and they should not rush in every time there is an annoucement of rights.  They should classify the rights issue they are considering in accordance with the three categories indicated below:

(1) The case of the improperly managed companies
(2)  The case of moving into new business area
(3) The case of the very fast growing company

They should purchase only those of the last category.

Many will protest that they have neither the time nor the knowledge to carry out a detailed analysis of the company which announces the rights. 

It is not possible for each and every one to carry out a careful analysis but there is an easier way out for the small timers.  The dividend yield approach to stock valuation can be readily used to value a rights issue.

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