If a company sells new shares at a price lower than the current price then the stock price will naturally go lower. What I don't understand is so long as the new shares are sold then eventually the lower prices will eventually go back to their original price so long as market conditions hsving changed. And it therefore offers a buying opportunity at its new price?
M
malaguti
Benny, this would depend on how the shares were issued, to determine whether the value might be affected. example, a company sells me shares at a discount, because im a loyal employee however the value of everyone else's shares hasn't necessarily been affected as the consideration for those shares would have been borne by the company. the company hasn't "diluted" the share capital
a rights issue again is another non-dilutive way to raise capital.
a convertible bond on the other hand can dilute the capital as well as I believe an issue of shares as dividend..so you always see the price go down at dividend issue
so I don't think they will naturally go down..all depends on the circumstance..
anyway, apologies for the pedantry
as for the dividend scenario, you might think that the new lower value will offer a buying opportunity but its no way certain. sometimes they do, sometimes also they don't. I looked into any sort of pattern but it was by no means certain. I can dig out a couple of scenarios, which was some time ago now
typically the value rises closer to ex dividend date, as anything after that date you are no longer part of any dividend payout and drops afterwards due to the dilution and also as there is no longer a desire to hold a share which may or may not pay out next dividend payment
hope this makes sense, and is the best explanation I can give..i'll look for those two scenarios as all market conditions were the same, one stock they rose immediately afterwards and the other died a slow death...and like i say this happened quite regularly
The reason I ask is Kinross Gold shot down over 5% yesterday after they sold a bunch of new shares for $3 down from a stock price of $3.18. I'm in the stock so am obviously not very happy and want to exit my position. At the same time though I am wondering if I should buy up more shares if the price will rise back up and I'd make back the lost 5% plus more from my new shares. Alternatively though if the stock will remain down for a few weeks i will withdraw until the shares are sold then re enter my position and hope for a rise.
Any insight would be very helpful as I am new to buying actual stocks so am clueless as to what is going on???!!
M
malaguti
http://www.trade2win.com/boards/sto...oss-massive-buying-potential.html#post2711858
this is my opinion. i wouldn't have bought yet as its early, id wait for a retracement and then if it went higher, i'd look at buying ( or buying more)
Why is that?
M
malaguti
im not sure what you're asking why to..
its early, as a new trend hasn't been established yet. a retracement and then break higher would suggest higher highs higher lows..equals potential new uptrend starting. hope that helps
I guess what I don't understand is why the stock has dropped? Okay they sold some shares at $3 but so what? That doesn't change the value of the whole company so why has the price gone down? If it is due to fear that the shares won't be sold then that's huge buying potential. Or is it because the company has been damaged by selling stock too low so the $3 price is justified??
M
malaguti
the stock has dropped because more people are selling than buying
it doesn't matter why. I say it doesn't matter because who on earth could really know why? nobody other than those who actually owned the stock..you'll never get to know that and no "expert" is also going to know. they give their tuppence worth of opinions because they are "experts" and its their job to give an opinion nothing more
your job is not to listen to "experts" because you or i are more of an expert than they might be and you or i actually have a vested interest (or you do anyway..they don't)
dont look for reasons why..just look for clues as to what is happening with the price and look for a new trend beginning.
Thank you for your help Malagutu. The conclusion I draw from this (please correct me if I am wrong) is that if a broker outside of this deal wanted to sell to an investor they aren't going to be able to as there is now this other broker in the deal who is selling at 3 dollars. Therefore they have to sell at a lower price. So it won't be until the new shares run out that the price can rise again. I am therefore going to increase my position.
M
malaguti
thats an odd conclusion..
at the moment an investor who holds stock can only sell at the current price. if new buyers (volume enough to support the drop) come in and raise prices, an investor would sell at a higher price.
nothing says you should buy more, as you don't know whats going to happen which seems to be the recurring issue. you are trying to infer something which may or may not come to fruition. wait for it to happen ie confirmation of a new trend starting
don't rely on assumption of brokers or the actions of investors. they will tell you, and it will appear in the form of rising highs. wait for that to happen. thats the only conclusion you should be drawing from what ive said, nothing else
Company A is valued at £2000. 50 percent of the company (1000 shares) are therefore worth £1000 and shares are £1 each. The company issues another 200 shares at £.50 each so each share is worth (£1100/1200) £.91. But the company is still worth £2000 so in time the share prices will return to £1. Or am I wrong and the company has created the 200 new shares out of thin air?
barjon
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What do you mean "the company is valued at £2000". Who says so. The price of the shares is not governed by some internal valuation, but by the price people are prepared to pay for them.
In general, if the company put the proceeds from the share sale to good use - and thus increase the company's profitability and earnings - then demand for the company's shares will reflect that likelihood.
dbphoenix
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The value of a stock and the value of a company are two different things. That become clear 15 years ago. If you're confused and don't know what to do from this point forward, close out your trade and review your options. Nothing is preventing you from buying back in if that's what you decide to do.
Db
Claude Bottom
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Well we've missed Friday's NYSE open, so this may be too late, but anyway...
Magaluti is right. A rights issue is non-dilutive in that the current shareholders have the right to subscribe for the new shares in proportion to their existing shareholding. If you own 10% of a company, you have the right to subscribe to 10% of the new shares and maintain your 10% shareholding in the company and not get diluted. A convertible bond issue, by comparison, usually issues new shares in the same way(*), but it's the convertible bond holders who have the right to convert into them, diluting the percentage shareholding of the existing shareholders.
However, as barjohn's calculations show, just because something is non-dilutive doesn't mean the share price isn't adjusted. In your example, your calculation is nearly right, but you've added 50% of the capital raised and 100% of the shares issued. The right calculation is:
Company A's market cap is £2000 and there are 2000 shares trading at £1 each.
The company issues 200 shares at a price of £.50 each.
So now:
There are 2000 + 200 = 2200 shares
The new "value" of the company is the old value PLUS the cash they receive from the rights issue.
The adjusted value is therefore £2000 + (200 * £0.50) = 2000 + 100 = £2100
The adjusted share price is the value divided by the shares in issue = £2100 / 2200 = £0.9545
So the company is not "still worth £2000". It's now worth £2100, but there are 2200 shares in issue.
If the perceived value of the company doesn't change, it should now be trading at £0.9545. However, usually the bigger effect on the share price is the reason for the rights issue. If the company's done the rights issue because it's doing something new and exciting, the share may trade higher. Usually it's because the old and boring stuff needs an injection of cash. That bodes badly for the future profitability of the company, so the share will be trading lower. In any event, shareholders usually don't like to be asked to stump up cash to maintain their shareholding, so as a rule shares will trade a bit lower after a rights issue.
In the case of Kinross, it wasn't a rights issue it was a bought deal, so it was dilutive anyway. The calculation is the same, but you don't have to stump up the cash and you don't get the new shares either. They're using the proceeds to repay the credit facilities they used to purchase assets from Barrick Gold and to repay debt maturing in 2016, so they're injecting cash into the old and boring stuff.
Hope this helps,
Claude
(*) A CB issue doesn't have to create new shares. It could be an exchangeable into existing shares.
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BennyC - Its a complicated field and for all I know the shares you've bought could be the best investment ever, but the risk you're taking by holding despite your lack of knowledge is too high. If you can't accurately gauge the amount of risk you're running compared to your original investment, how do you know you're not risking 100% of it?
My advice is sell all your shares now, learn about share dealing, develop a plan, test it, and only then buy these / some other shares.
My advice is sell all your shares now, learn about share dealing, develop a plan, test it, and only then buy these / some other shares.
