Introduction to the Stock Market

The Why

Are you looking to grow your business, but need capital? Have you exhausted all other options, or want to avoid borrowing and taking on further debt? Or, perhaps you run a family business and your relatives are keen to cash in on their holdings?

You could consider floating on the stock market.

There are several reasons why businesses choose to trade publicly, but the main benefit is that the company gains a separate public (and legal) identity, and its shares have a recognisable value with their price quoted on the market. The owners sacrifice part of their ownership of the company, in exchange for money to develop the business, or even just to spend and enjoy.

Some companies choose to float on the market so that they can offer a share scheme to employees, incentivising staff to stay with the company long-term and boosting engagement.

The How

There are several ways to come to market, the simplest and cheapest being an “introduction”, which requires no fundraising or advertising, and doesn’t involve underwriters. You can usually only use this method if over a quarter of your company’s shares are already in public hands. Unfortunately, this method also limits any opportunity for boosting the company’s public profile, so if your reason for floating is to generate awareness, this probably isn’t the one for you.

“Placing” is the method of offering shares to a select base of institutional investors, allowing the business to raise capital with lower costs and more freedom than an IPO. It also allows the business to choose its investors, but this can result in a narrower shareholder base, meaning less liquidity in the shares.

The most expensive, but potentially the most lucrative, way for a company to float on the market is by an Initial Public Offering (IPO). This involves publishing the details of the business, including its directors, its financial position, and its profit forecast. The company then announces the issue of new shares, suggests an offer price, and invites subscriptions from both institutional and private investors. Businesses usually pitch offer prices low to make sure that the issue is successful. 

Traditionally, investors would then ‘stag’ an issue – apply for too many shares and sell them as soon as the market opens, making a profit. In the past, companies only required payment after shares had been allocated, making ‘stagging’ an attractive (and lucrative) prospect, but nowadays most companies ask for payment upon application.

In cases of oversubscription, the company will usually allocate each subscriber a percentage of the shares they requested, and return the remainder of the subscription money. Occasionally, the offer will stipulate that applications for large numbers of shares will be scaled back or rejected. This prevents monopolisation, but can increase the risk of fraud, with investors sometimes buying shares in the names of their children, or even pets, to circumnavigate the rules.

If an issue is undersubscribed, the underwriters (usually investment banks) agree to buy any shares not taken up by the public, in return for a fee from the company. 

The Downside

Whilst going public offers some great benefits, i.e. lots of extra money and more protection for the business owners, it also has its negative side effects. It can be incredibly expensive to go through the process, and you will be required to disclose certain information – information that your competitors might gleefully rub their hands together over, and then buy enough shares to take control of your company. It also means that you no longer own 100% of your business, which might seem obvious, but you won’t be able to make decisions about your company without consulting a board of directors.