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When a private company reaches a point in it’s development that it requires an injection of capital to grow the business, then the directors have 2 decisions. One of the most popular methods is to Raise the company.
Floating, sometimes called Listing, involves taking a private company public to get money for company expansion and growth. Members of the public as well as fund management institutions are invited to buy stocks in the Initial Public Offering (IPO).
The Prospectus
Before any company may solicit funds from the public, laws require that it must draw up an offer document called a prospectus, which should be registered with the Australian Securities and Investment Commission (ASIC). This must present enough details and finance info on the company to allow a potential investor to make a good choice on the suitability of the shares for his or her portfolio.
The level of information that must be provided (which can regularly appear insurmountable to readers) is only one requirement that must go with a listing application. Govt. shopper protection legislation is one consideration, but the stock market itself will have its own listing standards. Such things as charges, needed paperwork, reporting requirements, size of the company and number of stockholders, and so on. Will all figure in a listing decision. As an example, one duty of the ASX is that a company has at least 400 holders of $2,000 each.
This sale of shares has taken place on the Primary Market. The money raised from the sale of shares has gone to the company to permit it to grow its operation. The new stockholders will wish to see the company is well run, pro and efficient. To do that, the investors will elect a board to manage the everyday running of the company. They do this by voting as per the size of their shareholdings. This might result in, say, the election of a six-person board which selects its own chairman. Every year, the board of directors must conduct a yearly general meeting (AGM) to report to the shareholders on the organization's progress. Some way ahead of the meeting, a copy of the annual report will be supplied to all investors. All stockholders are welcome to visit the AGM’s.
Backers, especially share traders, bought the stocks in the float with a view to selling them in the future to make a capital gain. They must thus have a market at which to sell the shares. This is where the shareholders return once again to the stock market.
When the financier sells his or her shares, the money raised doesn't go to the listed company, as an alternative the money, minus broker commission (brokerage) goes to the investor. This is known as the Secondary Market. The Secondary Market is where the are shares are traded once they've been purchased in the IPO.
This may seem excruciatingly plain; nonetheless it raises a vital point. Many of us who invest in shares for the 1st time don't fully appreciate that the value of a firm's shares is not without delay related to the performance of the company, or who the company is. As an alternative the value of the shares is based on the public’s recognized worth of the company. What Telstra does as a company is not as important as what the public understand the value of Telstra’s shares to be. There are plenty of examples of companies that are extremely sound and well run, but are undervalued by the general public. Otherwise, there are corporations which don't even produce profits whose share costs have zoomed. You only have to remember back to some of the American Web stocks such as Yahoo and Amazon.com for examples. These two companies hadn't even produced profits when they floated, yet their share costs rose stunningly fast, making the first owners billionaires literally overnight! It's this variance in share price and public perception that inspires share financiers and allows them to make constantly high returns from the stock market.
The Final Analysis
The bottom line is that you can't expect to be solidly successful as a share trader or investor by simply purchasing shares in corporations that sound fascinating. You must know the way to analyze the company and to observe the share price performance to figure out which shares have the best potential to perform.
John has over 40 years of experience in business promoting sales engineering general management online real-estate planning, for the past 20 years John has been a active Meditation Student. He has worked for and with worldwide corporations such as IBM, Electronic Data Systems and Mahindra British Telecomm. He has a BS from Brown in Computer Science an MA through IBM in Industrial Electronics, he also has a PhD in International Trade and Management from the London School of Business and Trade.