“New share issue” (in Swedish, nyemission) is a term you often come across in finance. But what actually is a new share issue? In this article we go through everything you need to know about the different types of new share issue and how they work.
What is a new share issue?
The most important thing to understand is of course “What does a new share issue mean?”. A new share issue is when a company invites the public or existing shareholders to buy more shares in the company. The company then chooses to increase the number of shares in the company and sell them.
It is common for the subscription price in new share issues to be lower than before, in order to attract more buyers to invest in the company. A new share issue can be carried out by both a private limited company and a public limited company.
Different types of new share issue
There are different types of new share issue that companies carry out for different purposes. Here are the most common types:
Rights issue
A new share issue with preferential rights (a rights issue) means that the sale of the shares is aimed primarily at the existing shareholders. They therefore get a preferential right to invest in more shares, often at a lower price.
If you are not an existing shareholder, you may still get the chance to take part in a new share issue. But only if several of the shareholders want to sell their subscription rights. The company may then choose to allocate the remaining shares that are not taken up by lottery among those who have registered interest. If you are interested, it is therefore important to contact the company so that you do not miss the chance to buy shares from them.
Open new share issue
An open new share issue is in principle the opposite of a rights issue. Here, the public is instead offered the chance to take part in the issue and buy shares in the company. One reason companies choose an open new share issue is, for example, to build brand awareness and give a wide range of investors the opportunity to invest.
Directed new share issue
So what is a directed new share issue? A directed issue means that the company itself has chosen to offer new shares only to a specific group. This may be, for example, a specific company/institution, specific investors, employees of the company or investors who have shown interest in taking part in previous new share issues but did not get a place for various reasons.
Why carry out a new share issue?
There are several reasons why a company chooses to carry out a new share issue. But it is always about the company needing to bring in new capital to finance something. It may need money because it wants to:
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- Finance a specific initiative or investment
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- Avoid possible bankruptcy
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- Finance an expansion
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- Acquire other companies
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- Avoid borrowing money
Example of how a new share issue works
So what does a new share issue mean in practice, and how does it work? It is easiest to explain step by step.
Step 1: The board prepares and submits a proposal to carry out a new share issue.
Step 2: The general meeting/board decides whether the new share issue is to be carried out.
Step 3: They also decide what type of new share issue it will be (rights, open or directed).
Step 4: A subscription period for the new share issue is set (how long investors have to buy shares).
Step 5: The subscription period begins and an invitation with information is sent out.
Step 6: Those invited register their interest and are then allocated shares.
Step 7: Payment is made and the shares are registered with Bolagsverket (the Swedish Companies Registration Office).
How to protect yourself against dilution in a new share issue
It is not always a given that an existing shareholder wants to take part in a new share issue. But what you need to be aware of is that if you, as an existing shareholder, choose not to take part in a new share issue, the share of the company you own will be smaller once the issue is complete.
This is because the company has increased the number of shares in the company, and if you do not buy more shares, the percentage of the company you own will be smaller after a new share issue. This is called dilution and always happens when the number of shares in a company is increased.
You can protect your stake in the company by taking part in the new share issue and buying more shares. In most new share issues, you as an existing shareholder have the right to protect your stake.
Buying into a company that has a rights issue
If you know that a company you are interested in often has rights issues, you can still register your interest in case there are shares left over once the existing shareholders have bought theirs.
It works the same way whether it is unlisted shares or shares in a listed company. Once you have invested in the company you are interested in, you will then always receive information about future new share issues.
Answers to common questions
How is a share price affected after a new share issue?
The share price can be affected both before and after a new share issue. But if a company sells its shares at a lower price in the new share issue, this means that the price of all shares will fall once the new share issue is complete.
Is a new share issue good or bad?
It can be both good and bad; it depends entirely on the reason behind the new share issue. If it is done to finance the purchase of another company or to invest in an initiative, it is good. But if it is done to rescue a difficult financial situation, it is worse.
Is it good to take part in a new share issue?
In most cases it is good to take part in a new share issue, precisely so that you get the chance to protect your stake in the company, given that you still believe in the company. If you do not take part, your stake will decrease in percentage terms as the number of shares in the company increases.
Can you buy an entire company through a new share issue?
No, a new share issue creates new shares that you can buy, but it is not an opportunity to buy an entire company. If you want to buy all the shares in a company, it is better to contact an investment bank that specialises in M&A if it is a larger company you are buying. If it is a smaller company you want to buy, a business broker is usually better suited.
