• Trading Information - Buying Into a Pullback
• The Equilateral Triangle
• Trading Chart Patterns
• Share Purchase Plans
• Yellow Cake…Anyone?
• Read the tape – it can tell an interesting story

Rules and Regulations
A SPP allows a company to raise capital from existing shareholders up to a maximum of $15,000 in 12 months for any individual share holder without issuing a prospectus. Consequently, it is a cheap way for a company to raise capital as they do not have to incur all the costs of creating a prospectus and lodging this with ASIC. SPP are normally restricted to Australian or New Zealand residents.  

The SPP is different to a rights issue as all shareholders can participate up to the maximum $15,000 limit even if they own only 1 share! With a rights issue the number of shares that a shareholder can purchase is directly related to the number of shares that the shareholder owns, e.g. a one for ten offer allows the share holder to buy one share for every ten shares they own. This means its probably a good idea to retain a variety of shares on the ASX, even if its only 1 share in your portfolio. 

Assessing the Risk
Before you rush out to purchase the share it pays to do a quick risk assessment of owning the share. You will own the share and hold it for a certain period of time, so a discounted purchase price is only of any value if you can sell it at the higher price. If the share price drops sharply you may be left to sell the shares, or continue to own them, at an even lower price. There are a few key risk measures to check before you go any further.

Discount
Most importantly check out that the price offered under the SPP is less than the current trading price. This is critical to getting the discount on the shares. Some SPP’s offer shares at a set price and others calculate them at a set discount based on the average price leading up to the issue of the shares. The details of this information will be found in the announcement of the SPP.

Liquidity
It is vitally important that enough volume trades so that you can easily sell the shares when it comes time to get out. Trading illiquid shares is a recipe for disaster and even a hefty discount can evaporate if enough people try to sell at the same time. As a rule of thumb ensure that the share has a turnover of at least $1 million per day. This can be calculated by multiplying the average volume over the last two weeks by the current price. If it trades less than this it is probably best to avoid this opportunity.

Profitability
Check out whether the company is profitable, ie is their latest net profit after tax greater than zero. This information can be found in their latest report, either half yearly or annual. Remember you are becoming a shareholder in the company even if you only expect it to be for a short time.

Stability
And a couple of further considerations to take into account is whether the company is one of the top 200 companies as these companies have a much greater institutional following and are likely to be more stable in price. If the SPP is underwritten this means that an institution has agreed to pick up the additional shares that are not purchased by individual shareholders.

How To Get Started

So now if you are ready to proceed here is the trick. If you own just one share you can participate in a share purchase plan, but in reality you can not go out and buy one share. The smallest marketable parcel is $500, so if you do not already own the share you must buy $500 worth of the share at least 3 trading days before the record date. The record date is the date on which the company determines who is entitled to participate in the SPP, but because it takes three days for ownership to be registered after the trade occurs (T+3) you must buy at least three days before the record date.

Act Before it is Too Late

If you now own the shares and are eligible to participate in the SPP there are a couple more steps to follow. Keep your eye on the mail box as you will receive the full details of the offer in the mail. This will include the application form and details for making payment for the shares. Take careful note of the closing date for the offer. It is vitally important that the company receives the money on or before the closing date. It is advisable to hold off for as long as you can before posting a cheque or transferring the money via BPay, but it must be in by the closing date.

Before you send in your funds make sure the discount still remains. Make sure the discount is at least 10% before proceeding any further. Lend Lease cancelled their SPP as the share price fell below the offer price before the closing date. A few companies have extended the closing date of the offer as well to allow investors more time to get their funds in, so stay in touch with what is happening.

Once the application is posted there is one more date to keep up with and that is the Issue date when the new shares are issued to the shareholders. The shares will be available to trade soon after the issue date. If the issue is oversubscribed it is possible that the company will reduce the number of shares issued to each investor.

Take Profits

pt; mso-ansi-language: EN-NZ;" lang="EN-NZ">And the last step is to sell your shares and pocket the profit. If you have assessed the SPP well you should receive the shares at a discount and be able to sell them into the market for a higher price. While the return is usually between 5 – 10% this return often occurs in a few days. Do that a few times a year and your portfolio will begin to grow. If you want to pursue this strategy in the same company in the future, sell all but one share and that one share will allow you to be eligible to participate in future offers from the company.

For those of you who do not like to wait and prefer to eliminate the risk of changes in the share price from the closing date to the issue date, you could consider the following strategy. On the day that you decide to subscribe for the SPP you know that there is a certain discount, before you proceed. To lock in this price it is necessary to sell your shares at the current market price, but there is a problem, you do not yet own the shares. If you have a CFD account you can sell the same quantity of CFDs as the number of shares you will own and you have now locked in the sale price. If the share price falls you will sell your shares for a lower price, but will make a gain on the CFDs. If the share price rises you will sell shares at a higher price and make a loss on the CFDs. Your profit is now certain and the cost of doing this is fairly low.

James Gerrish