Let’s say the Widget Group Nil paid letters from the example above, are trading at R2.00 on the market.

If an Investor that doesn’t own any Widget Group shares, buys a quantity of Widget Group Nil paid letters, the ownership of these Nil Paid letters gives the Investor the same right to buy additional Widget Group shares at R3 at the expiry of the rights offer period as that that was given to Widget Group shareholders when the rights offer began.

Nil paid letters are usually bought by Investors for 2 reasons:

Buying nil paid letters enables them to buy Widget Group shares at a price less than the market value.
In our example, the price of the Nil paid letters (R2 / share in our example) PLUS the price they will have to pay when they exercise the rights (R3 / share) = R5
This R5 total cost represents a discount of R0.50 on the market value of R5.50 per share so it’s an attractive option for many Investors.

As with all traded instruments, nil paid letters present Investors with an opportunity to make a profit (and a loss if they get it wrong) on the price movement of the instrument.
Sticking with our example, an Investor might be able to buy a quantity of nil paid letters at R1.50 and sell them before the end of the period for R2, thereby making a profit of R0.50 per nil paid letter.

Due to the temporary nature of nil paid letters, explained above, the nil paid letters expire at the end of the rights offer period. ( called the Last Day to Trade)

An Investor who holds nil paid letters on the expiry date will lose the money they used to purchase the instruments unless:

a.> They notify their broker of their intention to exercise their rights and have sufficient available funds in their account at the time the funds are due; OR

b.> They sell their Nil paid letters on the market before the expiry date.