Author: Jim Riley Last updated: Sunday 23 September, 2012
New share issues via public flotations
There are three main ways of raising equity finance:
- Retaining profits in the business (rather than distributing
them to equity shareholders);
- Selling new shares to existing shareholders (a "rights
- Selling new shares to the general public and investing
This revision note outlines the process involved in the
third method above.
How significant are new issues of shares in the
Issues of new shares to the public account for around 10%
of new equity finance in the UK.
Whilst not significant in the overall context of UK equity
financing, when new issues do occur, they are often large in terms of the
New issues are usually used at the time a business first
obtains a listing on the Stock Exchange. This process is called an Initial
Public Offering (“IPO”) or a “flotation”.
The process of a stock market flotation can apply both to
private and nationalised share issues. There are also several methods that
can be used. These methods are:
• An introduction
• Issue by tender
• Offer for sale
• Placing, and
• A public issue
In practice the “offer for sale” method is the
most common method of flotation. There is no restriction on the amount of
capital raised by this method.
The general procedures followed by the various methods of
flotation are broadly the same. These include
- Advertising, e.g. in newspapers
- Following legal requirements, and Stock Exchange regulations
in terms of the large volumes of information which must be provided. Great
expense is incurred in providing this information, e.g. lawyers, accountants,
Why issue new shares on a stock exchange?
The following are reasons why a company may seek a stock
(1) Access to a wider pool of finance
A stock market listing widens the number of potential investors.
It may also improve the company's credit rating, making debt finance easier
and cheaper to obtain.
(2) Improved marketability of shares
Shares that are traded on the stock market can be bought
and sold in relatively small quantities at any time. Existing investors can
easily realise a part of their holding.
(3) Transfer of capital to other uses
Founder owners may wish to liquidate the major part of their
holding either for personal reasons or for investment in other new business
(4) Enhancement of company image
Quoted companies are commonly believed to be more financially
stable. A stock exchange listing may improve the image of the company with
its customers and suppliers, allowing it to gain additional business and to
improve its buying power.
(5) Facilitation of growth by acquisition
A listed company is in a better position to make a paper
offer for a target company than an unlisted one.
However, the owners of a private company which becomes
a listed plc (public company) must accept that the change is likely to involve
a significant loss of control to a wider circle of investors. The risk of
the company being taken over will also increase following listing.
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