Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ======Subscription Price====== The Subscription Price is the special, predetermined price at which existing shareholders are invited to purchase additional, newly issued shares directly from a company. This process is a core feature of a fundraising event known as a [[Rights Offering]] (or rights issue). Think of it as a private sale exclusively for the company's current owners. The subscription price is almost always set at a discount to the stock's current [[Market Price]] on the open market. This discount isn't just a kind gesture; it's a powerful incentive designed to encourage shareholders to participate and provide the company with fresh capital. For a value investor, the announcement of a rights issue and its subscription price is a critical moment. It presents both a potential opportunity to buy more of a beloved company on the cheap and a crucial prompt to re-evaluate the company's long-term strategy and capital management. ===== How Does a Subscription Price Work? ===== When a company needs to raise money—perhaps to fund an expansion, pay down debt, or navigate a difficult period—it can choose to issue new shares. Instead of offering these shares to the general public, it can give its existing shareholders the first "right" of refusal. The subscription price is the price tag on that exclusive offer. ==== The Rights Offering Mechanism ==== The process is quite structured and typically unfolds in a few key steps: * **The Announcement:** The company declares its intention to raise capital through a rights offering, announcing the subscription price and the terms of the deal. * **Issuing the Rights:** Existing shareholders receive [[Subscription Rights]] (sometimes called [[Warrants]]), which are essentially tradable vouchers. Typically, an investor receives one right for every share they already own. * **The Exchange Ratio:** The company specifies how many rights are needed to purchase one new share at the subscription price. For example, it might state that an investor needs to tender 10 rights to buy 1 new share. * **The Decision Window:** Shareholders are given a limited time (usually a few weeks) to decide what to do with their rights. Let's say you own 50 shares of "Global Goods Corp." The company announces a rights offering with a subscription price of $80 per share, while the stock is trading on the market at $100. The terms are 5 rights for 1 new share. You would receive 50 rights, giving you the ability to buy 10 new shares (50 rights / 5 rights per share) for just $80 each—a significant saving compared to the open market. ===== Why Should a Value Investor Care? ===== For the value investor, a subscription price is more than just a number; it's a signal that requires careful analysis. The key is to look past the immediate discount and focus on the long-term value implications. ==== The Alluring Discount vs. The Dilution Dilemma ==== The most obvious appeal is the discount. Buying shares at a subscription price below the market value feels like an instant win. It's an opportunity to increase your stake in a company you've already researched and believe in, but at a better price. However, there's a flip side: [[Dilution]]. When a company issues new shares, the ownership pie is cut into more slices. If you choose //not// to participate in the rights offering, your existing shares will represent a smaller percentage of the bigger, post-offering company. This is the "stick" that complements the discount's "carrot." The company is effectively telling shareholders: "Help us fund our future and maintain your ownership stake, or stand by and watch your slice of the pie get smaller." A savvy investor must ask: * Why does the company need this capital? Is it for a promising growth project or to patch holes in a sinking ship? * Will the new capital be deployed in a way that creates value exceeding the dilution? * Is the company still a bargain, even after considering the new shares and the reason for their issuance? ===== A Practical Example ===== Let's walk through a scenario to see the moving parts. * **Company:** Euro Motors AG * **Current Shares Outstanding:** 2,000,000 * **Your Holdings:** 2,000 shares (You own 0.1% of the company) * **Current Market Price:** €100 per share * **The Offer:** Euro Motors announces a rights offering to fund a new electric vehicle factory. * **Subscription Price:** €80 per share. * **Terms:** It's a 1-for-4 offering. This means you can buy 1 new share for every 4 shares you currently own. You have 2,000 shares, so you have the right to purchase 500 new shares (2,000 / 4). === Your Three Choices === - **1. Exercise Your Rights:** You can buy 500 new shares at the subscription price of €80. This would cost you €40,000 (500 shares x €80). If you bought those same 500 shares on the market, it would have cost you €50,000 (€100 x 500). By exercising your rights, you've saved €10,000 and maintained your 0.1% ownership stake in a now larger, better-capitalized company. - **2. Sell Your Rights:** Many rights are tradable for a short period. Their value is linked to the discount. In this case, each right allows you to save €20 on a share. Another investor might pay you for that privilege, allowing you to pocket some cash without investing more capital. - **3. Do Nothing:** If you let your rights expire, you invest nothing more. However, the company will issue 500,000 new shares to other participating investors (2,000,000 total shares / 4). The new total shares outstanding will be 2,500,000. Your 2,000 shares now only represent 0.08% of the company (2,000 / 2,500,000), not 0.1%. Your ownership has been diluted. ===== The Bottom Line ===== The Subscription Price is the cornerstone of a rights offering, presenting shareholders with a clear choice. It’s a mechanism that allows companies to raise capital from their most loyal supporters. For the value investor, it's a test of conviction. A low subscription price is attractive, but it should never be the sole reason to invest more. The real task is to analyze the "why" behind the offering and determine if it strengthens the long-term investment thesis or signals underlying weakness. A great price for a business going in the wrong direction is a classic value trap.