Share purchase plans: good deal for investors or red flag?
Share purchase plans are a popular way for companies to raise funds, but are they the win-win they're touted as?
Share purchase plans provide existing shareholders the opportunity to buy newly issued shares, without brokerage fees, below the market price.
The central attraction of share purchase plans is the discounted rate you can purchase shares relative to the existing market price. It's theoretically possible but rare for a company to offer a share purchase plan at the market price, because the discount incentivises investment.
The participation limit for each retail investor over a one-year period used to be $15,000, but was increased last year by the Australian Securities and Investment Commission (ASIC) to $30,000 to give small mum and dad investors the same terms and conditions as corporations.
Kogan, among other examples, is offering its regular investors a SPP of $11.45 per shares, a massive 25% discount on its current market price of $15.21.
"If you do have confidence in the company and are looking to invest more, share purchase plans provide a great opportunity to do so," Ashley Bishop from Verse Wealth tells Money.
Seems like a good deal, and in many cases it is, but there are still some things investors should be mindful of.
"You want to understand why the company is raising money, and decide whether that decision is good for the company."
"A lot of companies are looking to shore up their balance sheets, and that's going to have an impact on their capital growth going forward."
Some investors use SPPs as a way to make some quick cash by purchasing the discounted shares before then selling them at the full market price. However, there's nothing saying the shares won't go down between the time you buy and sell them.
"It can be a way of earning a quick dollar, but you'll be taking on significant risk because the market does move up and down."
"From our point of view, you want to take up a share purchase plan with a longer term plan."
And as always, investors should consider their personal position before diving into a SPP.
"Even if they have the cash available, there's always an opportunity cost. You may have been looking at other companies, and investing in a share purchase plan means that you're putting more money into a single company - maybe that money can be better used diversifying your portfolio."
"Especially with COVID-19, if you have a shortage of cash, perhaps now's not the best time to take up a share purchase plan."