My Encounter with Rights Issue
Last week, I bought 3,000 shares of Ezra on 14 Sep 10. Although it was not a nice uptrending stock, the volatility is decent to make a potential profit. In other words, everytime the stock breaks a resistance, the price movement is large enough for a profit taking.
On the following day, I realised Ezra executed a Rights Issue. Ezra offred 1 stock at $1.18 for every 5 stocks held by shareholders. With 3,000 shares, I would be getting 600 shares (1 for 5). The 600 shares were distributed to my account and it was the same day I realised Ezra is making rights issue! Too late to do anything.
To make things worse, my stop loss for the 3,000 shares was triggered. Instead of having 3,600 shares, I was left with 600 shares. According to the chart, my stop loss would not have triggered as the price actually went up during the rights issue (it closed at $1.74 on 15 Sep). Puzzled, I went to ask my broker and he pointed out from the activity log that it was me that placed a LIMIT order to sell at $1.65. I was dumbfounded as I would never have keyed in a LIMIT order when I am trading. I always used stop orders. But the proof was there, the time, the date, the user and the order details were all captured. Guessed I made the mistake – turning profit into a loss.
And what to do with the 600 shares? I cannot place orders to sell because it is an odd lot. Called my broker to dispose them and he told me the firm will market make, buying from me, consolidate and sell to the market. He says the traded price may deviate 5-10% from the market price. This is crazy. 5-10%! But no choice, an odd lot will always have to take a bigger spread to get rid of. To my relief, it was sold at $1.70, about 2.3% spread.
Come to think of it, does a rights issue benefit shareholders? It seems like it only makes the owners and the brokers richer.
Will this happen next time? Probably. I should do my due dilligence to check for company announcements before trading any stocks. I am a lazy trader and hardworking investor, if you get what I mean.
About the Author: Alvin
Founder of BigFatPurse.com and author of Secrets of Singapore Trading Gurus. Loves the financial market. Curious to find out what work and what doesn't work in investing.Subscribe
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Hmm, as I understand it, the nil-paid rights shares have not yet been issued. How did you manage to sell them?
it’s good you are honest with yourself.
are you sure right issue also affecting cfd also, how about dividend, bonus issue and all other stuffs? how do they, the service provider or broker allocate such issues? can they be trusted? also what are the cost?
by the way i understand they also charge commission on stocks, plus the spread plus the slipage (like in this case), i don’t see why one should use this instrument (for stock trading)
Hi Alvin,
I don’t know which brokerage you are using to do this, but if you use POEMS, you can buy/sell the odd lots yourself through the UNIT SHARE market. This is where the odd lots are traded. Usually the price is a few bids lower than the bid of the ordinary lots at open market, that’s because of the liquidity of the odd lots being traded. But at least you can control it by placing the order yourself. I tried that ysd when I sold off my noble odd lots. The difference is 1 bid from the bid in the market for ordinary lots (and that’s because I’m lazy to Q).
If you didn’t want the right, you should have sold the nil-paid rights and not pay for it. I’m quite sure they will have the nil-paid rights like R100 or something, where the rights are sold at shares of 100 instead of the usual 1000 boardlot.
No excuses for not being alert on things that happened to your stock holdings, trading or not. In fact, when trading, you should be more attuned to such news, not switched off. Investors know what they are getting into, but for traders who often have no clue to the details of the financial health, big news like rights issue can make or break your trade.
i do not know the story about this stock. if you are getting 600 shares you should be paying them at 1.18, and if are alloted then you can get rid at the market price, should be higher (than 1.18), the different will be your profit.
however, after ex-right, the stock (ezra) will be traded at a discount so as to adjust the new issue (the right issue) and thats probably you get stop out during this adjustment.
right issue and private placement are just one of many ways of a company trying to rise fund. in the long run with proper management, it should benefit all shareholders including you.
“I’m quite sure they will have the nil-paid rights like R100 or something…”
he is trading CFD, probably no “nil-paid rights”, they just simply give him the shares that he entitle to, 600 shares. so check how much you pay for this 600 shares, should be 1.18.
“I am a lazy trader and hardworking investor, if you get what I mean.”
haha, i don’t.
do you mean a hardworking investor keep on looking for opportunities, jumping in and out of trades while a lazy trader trades very little and doesn’t border to check whats going on day in and day out?
then you should do the opposite, be a hardworking trader and a lazy investor.
Hey Alvin
Remembered you attended a seminar on the secrets to make profits from stock market last month. Thought you had learnt how to make profit from a stock that is giving out rights issue.
Hi coconut,
Oh, I didn’t know he’s trading CFD for ezra because it wasn’t mentioned in his post. I see i see…
Chu Yeow – I was using CFD so the rights are allocated accordingly.
coconut – i use a DMA broker and not a market maker. So the spread are market spread. Commissions are the same too. Haha, it is also true what you said “be a hardworking trader and a lazy investor”. What I meant as a lazy trader means to follow rules closely, don think too much or second guess the system. What I meant by hardworking investor is that I must do a sufficient homework before buying a stock.
Raymond – I have 2 approaches and 2 sets of capital. One for trading which I apply the T3B system. The other is fundamental investing, which is using Dennis’s methods.
LP – Thanks for your enlightenment
thanks for your reply, hard to get one haha.
base on your trading time frame i’ll term it as trading from days to a few months. so you really have to be on your toe. whereas investment range from years to 20 years or more., you can affort to be lazy.
yes i know DMA, i’m currently testing one and only use it to short stocks. and may i know why they allow you to place stop orders?? it should follow the SGX where only day limit orders are allow unless you are mixing the 2.
anyway since you are trading based on others trading system, you have to just steak with it until proven wrong.
to La PAPillon,
ya, wonder why ppl want to use CFD for trading stocks? but there is this DMA CFD, kind of a new entry that allows one to trade just like trading in the SGX. cash market.
i recently sign up one where i’m still testing their order executions. what i did was put out both order at the same time and wait for results, to my surprise, they almost done at the same time! there are still some disadvantages like consolidation of orders and so on but it worth a try.
i use it to short stocks where i can’t find elsewhere where i can borrow. they have good range of stock one can short .
Hi coconut,
Oh, I didn’t know that there’s this new entry here, will go and find out more about it
I thought for CFD normally, you’re playing with the broker themselves and not to the central clearing system for sgx, hmm…
But I don’t want to trade so much anymore these days, rather find the time to enjoy life
woa haha, good for you LP,
yes you are right, CFD is just a contract between you and your broker, got nothing to do with exchanges. although they claim that they will follow closely with exchange prices, same goes to stocks.
but when i traded stocks using DMA (direct market access) CFD, i actually saw my orders when into the order book of SGX after placing order with them, thro and fro i tried.
it means that they actually place orders to the exchange in order to hedge my orders. i guess they have other means to hedge or nuterilse my orders as well but as long as i get my order done in time, it really does not matter how they do it.
i guess each of every brokers have their pro and cons, one has to find out more.