What are subscription shares?
Subscription shares offer shareholders the right to buy shares at specified future dates or during pre-set conversion periods and at pre-set prices. They qualify for the stocks and shares component of an ISA, and it is this tax treatment that has made subscription shares a popular option for investment trust shareholders.
Investment in the subscription shares may not be suitable as a short-term investment. The value of a subscription share may go down as well as up.
Subscription shares represent a geared investment, so a relatively small movement in the market price of the ordinary shares may result in a disproportionately large movement, unfavourable or favourable, in the market price of the subscription shares. The market price of the subscription shares may therefore be volatile. As a result, the value of investments may fall suddenly and substantially. Investments are at risk and subscription shares could expire worthless if the net asset value of the company is below the final exercise price of the subscription share at the end of the life of the subscription shares.
Movements in the price of subscription shares may not be in line with the movement in the price of the ordinary shares. The price of a subscription share may not move in line with that of an Ordinary share because other factors contributing to their respective prices, for example supply and demand, are not directly related to one another and hence are unlikely to change at the same time and in the same manner. Further, the price of a subscription share is affected by factors that do not affect ordinary share price, such as the remaining life of the subscription shares.
How do subscription shares work?
Subscription shares, like warrants, lock in prices at which new ordinary shares may be subscribed for on future conversion dates or during predetermined conversion periods. As a holder of subscription shares, an investor can decide whether to subscribe for new ordinary shares on these dates. Investors would usually choose to convert their subscription share rights if the market price of an investment trust’s ordinary shares exceeds the conversion price by more than the subscription share price at the relevant conversion date.
For example, if the conversion price on the relevant conversion date was 150p and the market price of ordinary shares on that date was 100p, it would be anticipated that the subscription shares would not be converted. However, if the market price of ordinary shares on that date was 200p, it is likely that subscription shares would be converted.
Are subscription shares tradable in their own right?
Subscription shares can be bought and sold independently of the ordinary shares. Once issued, if an investor does not wish to retain their subscription shares, they can be sold on the stock exchange as they would sell any other security. Please note that due to their characteristics, subscription shares are not available for purchase through the J.P. Morgan Account.
How are subscription shares priced in the market?
The value given to subscription shares by traders is largely dependent on the underlying price of the ordinary shares that they are linked to. In general, this will increase as the price of the ordinary shares rises above the conversion price. Other factors that could influence the price include any stepped exercise prices, the time until conversion, share price volatility, interest rate movements and dividend yield.
How do I convert my subscription shares?
J.P. Morgan has two investment trusts with subscription shares in issue. Full details of the conversion prices and how to convert are detailed on the trust page, which can be accessed from the links below:
More about investment trusts
The value of your investments and the income from them can go down and up, and you may not get back as much as you paid in. Tax benefits and liabilities depend on individual circumstances and may change in the future.
Past performance is not a guide to the future.