Dangers of Personal Investing

I received a thick prospectus for a share that I invested in. The company is giving a rights issue to existing shareholders to subscribe for shares of another associated company. The deadline was about 1 week.

The prospectus was complicated. I have no idea about what the new shares were and if the amount to pay for the shares are at a fair value. I do not know if the rights issue had diluted the value of my existing shares.

I send an e-mail to ask my stockbroker to give me a summary of the rights issue, and also to tell me if I can sell my rights at the exchange. Fortunately, I have access to a stockbroker who is able to get his company's research department to answer my questions.

Many retail shareholders are placed at a disadvantage when a company has a rights issue. If they do not act on the rights, the value of their existing shares may be diluted. They should, at the least, sell the rights in the market and get a value that can cover the dilution in value of their "mother" shares.

Here is a real story. A retail investor bought the rights to subscribe to new shares and paid $60,000 to the owner of the rights. He is required to pay another $65,000 at the ATM to subscribe to the rights. As this is the first time that he is subscribing to the shares through the ATM, he entered the amount in the wrong field, i.e "apply for excess rights" rather than "apply for the subscribed rights". The company treated him as failing to subscribe for the new shares. He appealed to CDP and to the company to rectify this mistake but they told him that "nothing can be done". He lost $60,000 due to a small mistake.

There is a small chapter on personal investing in my book, Practical Guide on Financial Planning.  You can order here. There is a 15% discount if you order before 1 March 2010, two more days only.