INVESTMENT ANALYSIS - DIFFERENCE BEWTWEEN ;RIGHT AND SCRIP ISSUE

When you buy shares, you can take advantage of any rights issues or scrip issues the company offers you. Both of these ‘issues’ give you the opportunity to increase your shareholding at a discount. But what’s the difference? And why do companies offer them?  

There are two main reasons that companies offer shareholders rights issues and script issues.

Firstly, the company might need access to more funding. And secondly, the company might want to increase the liquidity of its shares. This is usually because the current share price is too high.

Let’s take a look at the difference between rights issues and script issues.

THE INS AND OUTS OF RIGHTS ISSUES

In a rights issue, the company offers you the right to buy shares at a slightly lower price than your existing shares. If you take up this offer, you won’t have to pay any stockbroker commissions on the transaction.

Say the company offers you a one for three rights issue. This means you have the right to buy one new share (at the lower price) for every three you already hold. Afterwards, the overall share price will even out at slightly below that of your original shares.

If you get an offer like this, you need to look into why the company wants the funding. Sometimes, rights issues raise funds for good reasons. But sometimes, they’re a sign of desperation and it can make sense not to take up the company’s offer.

SCRIP ISSUES DON’T COST YOU A DINE

A scrip issue is an issue of free shares involving a transfer within the company’s reserves. A scrip issue means you’ll end up with more shares, but the overall value of your shareholding stays the same. This is not the case with a rights issue.

So there you have it, the difference between rights issues and scrip issues.