This is not the first time that I have had to decide to participate in an SPP run by QBE Insurance. The last time was in 2012 and I saw an opportunity to make a nice little profit. However, as I documented on this blog I got scaled back to such an extent that I actually made an effective loss if you account for the amount of time that they held my money before returning it. I had applied for $15,000 in stock but received a paltry $32.10 and had the rest of my cash refunded to me.
A quick refresh on how to make money from Share Purchase Plans (SPPs)
I thought I would quickly run through how you can make money from share purchase plans. In fact it is quite similar to making money from a rights issue: You don't make the money from taking up your rights - the share price should adjust for this. You make your money from the difference between the price at which you buy the shares and the theoretical price the shares should trade after the raising.
For example. Assume Company A is trading at $10 per share and there are 100 shares.
- The issued capital of the company is worth $1,000
- Assume that it wants to raise another $500 for acquisitions so it taps it's shareholders for some more money
- The shareholders aren't necessarily going to give the company all of the money that it needs so the company issues shares at a 50% discount to the current value (i.e. for $5) per share. It needs $500 so it is going to issue another 100 shares
- The company now has an extra $500 of cash and an extra 100 shares. Therefore the company is worth the original $1000 + $500 = $1,500 and there are now 200 shares on issue making each share worth $7.50
- This $7.50 is the theoretical price the shares should trade at after the raising is done
So how do you make money