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casapinos, there's sometimes a trade to be had in the rights arbitrage. e.g. if you can long RRN for less than 32p below you can short RR. You then close when the arb narrows or take up the rights to net off the RR. short.

That's what quite a few traders, including me, did with HMSO/HMON because there was a very good arbitrage to be had, with HMON trading way below the logical level. I think that was due to the extraordinarily deep rights (25 for 1 as I recall), smack in the middle of a FTSE relegation (how daft is that, when you have index funds in the mix).

Whilst to the uninitiated it may look risk neutral there's always the danger of the short side being called in at very short notice, as they tried to do with HMSO.

Thanks casapinos.

In your scenario, provided you can realise the gains on the RRN shares without exercising them, I think the gearing comes about through the RRN shares being at a discount to RR. If you want to play that gearing you might as well be buying the RRN shares? The lower price on the RR. shares, the higher the gearing in RRN.

Or are you under thinking things?

If RR. currently trade at 82p, RRN trade at 50p.

You have a choice. Do you pay 32p to exercise those rights and get more RR. shares (currently worth 82p), or do you sell them for 50p.

If you decide to take up the rights, what has it cost you? 32p? But hang on, aren't you forgetting the 50p you could have got selling those rights? For the simple pressing of a button that's cash in the bank. Therefore taking up the rights costs you 82p, same as anyone else in the market today.

Yes shamI89, if someone bought 300 RR. shares before yesterday for £100 they could be sitting on a nice profit. When could they have bought them for 33.33p? In 2003 perhaps?

Also bear in mind at the start of the week they'd have been sitting on a 700% profit on those shares!

That's an interesting idea casapinos and I'm trying to think it through too.

The price of the RRN nil paid rights is obviously linked to the RR. price, being approximately 32p below RR.

What some people may not fully appreciate is that about 2/3rd of the value of their original investment in Rolls-Royce RR. shares is in now the RRN nil paid shares.. The value got transferred from open yesterday.
Therefore, addressing your question, yes if you can somehow manipulate a rise in RR. your RRN shares should track. I get that, but I don’t think it gives you a 4.333% gain in your original investment. That’s because you’re ignoring that most of the value of your investment is tied up in the nil paid rights shares.

If RR. trade at 82p the RRN will trade at about 50p. That means that for every 82p you have invested in RR. you’ve got another 166.67p invested in RRN. Of course, if you ignore the value you’ve got tied up in RRN it will flatter your percentage gains, but you can’t. It’s similar to people thinking they can make a profit selling the rights they exercised at 32p, ignoring the drop on the original shares they suffered yesterday.
Another problem I see is how do you realise your gains? In order to realise those gains you either have to sell RRN (thin market?) or take up the rights and subsequently sell them fully paid. If you take up the rights it will cost you 106.67 per RR. share you hold. That's an additional cash investment which will dilute your percentage gains.

It is a bit of a brain teaser!

casapinos, it depends how you short.

If you short CFDs via DMA, the provider has hedged the risk to market. They make their money on commission and overnight fees (currently I think 2.5% - LIBOR). I don't think it matters to them if you win or lose. In fact, they'd probably prefer you to win so you remain a client and you'll be a better credit risk. Incidentally, when interests rates are higher it's quite amusing to have overnight interest credited to your account on short positions!

I don't really see a difference between someone buying the stock and hoping to profit from a rising price and someone shorting hoping to profit from a falling price. Sure, you have to be careful not to over extend when trading on margin, particularly when you're a pro client without the account loss protection. Even so, I don't think it's the 'rocket science' you portray. I don’t have a maths PhD and I've been doing it for almost 20 years (initially with GNI) and never got into any silly scrapes with margin calls.

I'm sorry, but bringing your average down is muddled thinking. You could do that quite effectively by selling your rights!

As I've said several times before, it makes no difference from an investor's perspective if you take up rights of 10 for 3 at 32p, or 1 for 1 at 106.666p or 1 for 2 at 213.333p For a £2bn fund raise you part with the same amount of money to maintain your same stake in the company.

If you think a rights issue at 32p is a better deal for you than one at 213.33p it implies that you think the market cap of the company will be higher because they've raised £2bn from issuing shares at 32p than issuing shares at 213.33p.

Where am I going wrong?

magmanus_49, do the sums:-

A loyal shareholder bought three RR. shares recently at 240p each, total 720p.
They exercise their rights and acquire another ten shares for 320p
Total outlay 1,040p or average of 80p per share.

How has that loyal shareholder been rewarded, when I could buy at 80p or less today? They haven't been. Rights issues are to raise funds and they use the "discount" as a ploy to tap into the financial vulnerable.

magmanus_49, the rights are not a discount for loyal shareholders. They are the company asking shareholders to stump up money. Shareholders don't get a special deal over anyone else in the market. It's a financial conjuring trick and people fall for it.

scmdcyp, with IG do you mean a shares account or CFD/spread?

With CFD/spread I'd have expected them to have credited/adjusted (I don't know for sure as I didn't have a position running overnight).

With shares it might take them longer to book to the account. It seems a bit unfair because it might prevent you from selling at the best price, which is why people often open a short to lock in the gains.

It looks like you did well there fahmad, selling RR. at 100p and RRN at 68p this morning.

I fear some are inexperienced with rights issues and are wedded by the prospect of these "cheap" 32p shares. Had you taken up the rights at 32p you'd have missed out on selling them at 68p - i.e. an overall cost to you of 100p.

If you want to maintain your investment you can always buy the shares back lower now. Hopefully it's plain for people to see how taking up the rights isn't really cheaper than simply buying the normal RR. shares in the market.

For those who feel locked in because the rights haven't been credited to your account (this is quite normal with share accounts as opposed to CFD/spreads) you could always consider locking in your gains with some evil shorting. Sorry, possibly should have suggested it earlier!

Lurking traders will be watching the RR./RRN arbitrage. As should anyone buying RR. today. There's a good chance it will be cheaper to buy RRN and exercise the rights than it will be to buy RR. (less stamp duty too if you pay it).

However, sadly at the moment IG aren't taking new positions in RRN. Traders minted it with the HMSO/HMON arbitrage.

If it's averages you're worried about:-

Say you bought RR. yesterday at 230p

You sell your RRN rights today at 64p.

The average cost of your RR. shares is now 17p. Not too bad eh?

Taking up the rights is not the only way to get your average down!

Intothedeep, if you held at close last night you don't 'buy' the rights. You receive them free of charge (actually, you pay for them in the drop in the RR. share price).

If you want you can sell them. If you sell RRN for 64p that reduces your investment cost in Rolls-Royce by 213p per share.

You don't have to excercise the rights in order to get your average cost down. That will happen anyway, if you sell the rights or let them lapse and receive the lapsed proceeds.

Just in case some people haven't realised yet, instead of exercising your rights you could sell them. As I type you could get about 64p for them (they'll track about 32p below RR.). As you've received 3.3333 rights shares per exiting RR. share, that means you could sell them and get back 213p of the cost of your RR. shares.

Or you could say goodbye to that money, add another 106.7p on top and convert the rights to 3.3333 fully paid RR. shares. Your choice.

Rony, I understand your confusion over the record date. It's an easy mistake for someone to make when they encounter rights issues for the first time. The way the companies announce rights, making a big thing about the record date, is very confusing and misleading for the uninitiated. It's almost as if they want it to be.

Have a little think. Look into what trading "cum rights" and trading "ex rights" means. Think of the implications of the ex rights date not being 22nd Oct (T+2 settlement on 23rd record date). Have a look at the market claim procedure, whereby buyers between 23rd and close on 27th claim the rights off the sellers (albeit their brokers do).

No tomroberts11, you only have 6570 rights, not 8567. Therefore

32p * 6570 / 75p = 2803

I meant you didn't need to hold from 23rd. If you bought in today's closing auction and sell in tomorrow's opening auction, you'll qualify. Don't listen to anyone who tries to bamboozle you with record dates and settlement times.

As long as you held at close tonight you qualify for the rights. You can sell your original RR. from open tomorrow and receive the rights. The 23rd is a red herring, as anyone with a smidgen of sense knows.

If your broker has already booked your nil paid rights to your account, you'll be able to sell them too if you don't want to take them up. You should get about 32p less than RR. for them.