What is a companies incentive to issue rights in a bear market?
From what I gather a rights issue is when a company will offer its existing shareholders additional shares in a company.
So apparently a bull market is when the stock prices are going up (like an exponential graph) and a bear market is the opposite when you see share prices fall. Is this right?
So why would a company issue rights if its stock price is going down? Is this sort of like trying to get enough capital to go through a tough period?
#1 by JoeMay on November 25, 2009 - 16:53
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In a bull market more people want to buy than sell.
In a bear market more people want to sell than buy.
Rights (to buy at a set price), at times, are issued as a perk. It is up to the holder to decide when he/she wants to buy. Any forward looking company expects its stock to rise eventually.
#2 by tukai on November 25, 2009 - 17:23
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In a bear market sellers are more than buyers & in bull market it is just reverse.
#3 by Mayen on November 25, 2009 - 18:09
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I believe companies issue rights to employees at any given time, whether the stock price is high or low. In my experience, although I never bought any stocks in my previous company, I can see the movement of the stock price in a daily basis and it is a good sign of transparency. Joel is right, it is up to the employee whether he buys or not. But as you can see, indeed the purpose of the selling of the stocks is for companies to get more capital to use in the operation of the business. Hmm, what else could be the reason?
But personally, I don’t advise anyone to invest in stocks when you don’t have passive income yet as it will only drain your pocket because stocks are intangible investment and it is something that you do not have any control over with. It is really like a gamble.
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Mayen
#4 by Eddy T on November 25, 2009 - 18:38
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Normally a company issues rights issue in a bear market because it needs the capital to do writedowns or trying to grow too fast
However the situation can get worst if the government increase banks Tier l status during a bear market forcing banks to get help from it and using taxpayers money.Because during a credit crunch shareholders will not take up their rights because of obvious reasons. The government will need to take up those rights with taxpayers money and then take control of the bank. To make the bank working again, the government needs to pump in more capital for it to do its business. More taxpayers money or borrowings are needed. This will make the government to issue Treasury bills or bonds or to even to print money to help the economy. Unemployment and inflation will also get worse.
This is the main reason why Mr. Brown’s administration want banks to lend to each other and want to control those private British banks.