A company will initially be listed on the stock exchange via an initial public offering (IPO) or a “float”. This way, the investing public is made aware that a company is seeking funds to facilitate its expansion. Company owners can also sell a portion of their interest in the company or completely stay out of the float.
To know more information about the company and their prospects, you can view their legally-mandated prospectus. After reading it, you must fill in the application form to start buying shares. If the listing that you are interested in is popular, you might not receive all or any of the shares that you would like to buy. Thus, you will be given a refund.
Small or expensive floats can be acquired if your broker has an allocation of shares. New float shares are offered at a fixed price but the price begins to change once it is traded on the stock exchange. The share price is determined by the investors demand. Investors will pay more for shares in a company that has good prospects. However, they would potentially look to sell their shares if the prospectus forecasts are not met.
Investors attain profits by buying shares and selling them at a higher price on the first day of trading to investors who missed out on the allocation. Not all floats are successful and it is important to read the company’s prospectus before investing to understand their business. When investing in a newly listed company, you must apply the same criteria that you use when investing in an already listed company.
The initial investor sale of shares is considered the primary market, whilst the trading that goes on thereafter is the secondary market. A company can raise equity capital by giving more shares through rights issues and private placements. Companies can also give out shares through company options and dividend reinvestment plans.
Rights issue involves the distribution of ordinary shares to existing shareholders in proportion to the shares that they already have. Shareholders need not take up entitlement in a rights issue, though the option is offered at a discounted price which encourages them to claim the shares. The rights issue can either be renounceable to be sold to other investors or non-renounceable.
Information about the rights offer will also be specified in a prospectus that shows the terms of the rights issue, the price per share, the offering period and the ex-rights date. If they are not claimed within the subscribed period, the rights will expire. Usually, the price of a company’s shares goes down after the ex-rights date reflecting the value of the rights.
Companies can also conduct private placements which involve the sale of new ordinary shares to selected investors such as financial institutions. These placements have a minimum subscription of $500,000 and it must involve no more than 20 participants. From the company’s perspective, they can gain funds at a quicker rate with a private placement compared to a rights issue.
There is also a dividend reinvestment plan to give shareholders a chance to reinvest their dividends into new ordinary shares. Companies with DRPs offer a small discount to entice the shareholders. Though the DRP does not raise much equity, they can be offered again when no further equity finance is required. Shares that are purchased through DRPs are free from brokerage and stamp duty fees.
Company options are exercised if the offer price is less than the share market price. When reading a float prospectus, you will be able to find out if the investment suits your profile and investment strategy. You will also know if the shares are offered at a fair price and if you have enough understanding of this business or industry.
Asking why the company is listing, if the company has an experienced management team, also determining if the management and the owners are staying on in the company and becoming familiar with financial forecasts for the company are all essential components in the decision making process when investing in a company.
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