(4) Overall Market Trends
It is one of the most favorable factors affecting stock price action during rights issue. Like every stock, stock market as a whole also trend in a particular direction during different time frames. This ongoing trend can play a huge role in driving the stock price along with it.
A bearish or falling stock market can make it difficult for even a good stock to increase or sustain post issue levels. It is perhaps due to prevailing bearish sentiments among shareholders in the markets.
Investors are not ready to buy or hold a good stock. Additionally, profit booking is also prevalent in the market at every level.
On the other hand, a bullish or rising stock market can make it easy for even a poor stock to appreciate from post issue levels. It is again due to prevailing bullish sentiments among shareholders in the markets.
Investors are ready to buy or hold even a poor stock. Additionally, selling pressure is not enough in the market as no one wants to miss the bullish run at any cost.
Similarly, if markets are trending mixed then market price action after rights issue will probably remain mixed. Thus, overall market trends can tell the possible trend within a stock after rights issue to a great extent.
[Read Also: 11 Personal Benefits Of Promoters From A Rights Issue]
(5) Subscription Price Valuations In Rights Issue
It is one of the most significant factors affecting stock price action during rights issue. Rights shares can be issued to shareholders at any price. This issue price is usually decided unanimously by the board of the company.
Generally, the company will bring the issue at a certain discount to the market price. It is usually done to reward its existing shareholders to the new securities.
But, a rights issue offered at a huge discount can still be overvalued as compared to its fundamentals. Rights issue that is expensive for investors is likely to slide soon after share allotment process. These types of shares may fall even below the rights issue price.
On the other hand, rights issue that is undervalued or fairly valued should perform better for its shareholders. They are likely to appreciate more during favorable business growth.
Thus, investors should always seek for fairly valued or undervalued issues for subscription purpose rather than expensive issues.