explanation of oversubscribing:
When a stock has a rights offering, the shareholder can give his broker instructions either to exercise the rights, or to sell them. Those are the smart options. The shareholder could also do nothing, letting them expire worthless, which is pretty dumb, but it probably happens some.
When closed-end funds I've owned had rights offerings, I groaned with displeasure, and then I responded by asking the broker to exercise and also to 'oversubscribe'. The broker then asks how many shares do you want to oversubscribe? I specify a very large number, because if I got them, I would get them at below market prices, and I could possibly sell them immediately at a profit.
Of course there are lots of people out there who know the same thing, and they all try to oversubscribe too, so what the co. does then is allocate its oversubscription request.
Example:
If you owned 100 shares of BTIM, you would receive rights to buy 5 shares at the below market price. You would tell the broker you want to exercise thoese 5 rights, plus you want to oversubscribe for 1000 more shares. He takes your order. Weeks later some shares show up in your brokerage account, something more than 5 but less than 1005.
The unpredictability of how many shares you will actually end up with is a disadvantage here, as it does not let you know how many shares to short if you want to reduce your long side risk.
On the other hand, you could probably reduce your risk well enough just by buying the 100 long before the rights are issued, then short approximately 120 shares afterwards and oversubscribe with a request for at least 100 shares. |
