A stock market is a place where people buy and sell shares where as a new issue market is just a part of the stock market, in the sense that any company which has to raise its money from public has to come out with a public issue only after which that stock can be listed on the stock exchange.
A corporation’s first offering of stock to the public. IPO’s are almost invariably an opportunity for the existing investors and participating venture capitalists to make big profits, since for the first time their shares will be given a market value reflecting expectations for the company’s future growth.
The first time a company issues stock, it's called going public.
Going public, or taking a company public, means making it possible for outside investors to buy the company's stock. To go public, the management registers the stock with the Securities and Exchange Board of India (SEBI) and makes an initial public offering (IPO).
FROM PRIVATE TO PUBLIC OWNERSHIP
The road to public ownership often begins with an entrepreneur who has come up with an idea for a product or service and borrows enough money to launch a start-up business. If the company grows, the entrepreneur may be able to raise funds for expansion in the private equity market.
There, wealthy investors, investment companies, or other groups pool money — called venture capital — that they're willing to risk on a new business in exchange for a role in how the company is run and a share of the potential profits.
GOING PUBLIC
If a small company finds its product or service in great demand, it outstrips the ability of venture capitalists to provide money for rapid growth. That's when it decides to go public.
First, the management goes to investment bankers who agree to underwrite the stock offering — that is, to buy all the public shares at a set price and resell them to the general public, hopefully to great demand.
The underwriters help the company prepare a prospectus, a detailed analysis of the company's financial history, its products or services, and its management's background and experience. The prospectus also assesses the various risks the company faces.
ATTRACTING INVESTORS
The proposed stock sale is publicized in the financial press. The ads are commonly known as tombstones because of their black borders and heavy print.
The underwriters may also organize meetings between the company's management and institutional investors, such as pension or mutual fund managers. The day before the actual sale, underwriters price the issue, or establish the price they will pay for each share.
When the stock begins trading the next day, the price can rise or fall depending on whether investors agree or disagree with the underwriters' valuation of the new company.
SELLING DIRECT
Some companies may make a direct offering to investors, by selling shares in an online auction format. This type of offering may save money by eliminating fees paid to underwriters, and it may result in the issuer making more money from the offering itself. Companies who do an IPO this way still must meet the SEBI's filing rules.
One drawback of direct offerings for small companies is that they aren't followed by market analysts so that there could be limited knowledge about and interest in the offering. But that's not an issue for major companies who choose to go public this way.
When a public company issues new shares, the total number of shares traded in a secondary market goes up. Assuming there is no change in the fundamentals of the company and the profitability, I would expect that the share price of the existing shareholders would fall. However, this does not always happen in real life.
A company can only offer new shares if they have "unissued capital". Unissued capital is only a token restriction. When a company is incorporated a maximum number of shares is specified in the legal documentation. Most companies will make this an extremely large number so they never face that limitation. See here.
You wouldn't necessarily expect the stock price to change. The reason a company issues new stock is as a way to raise capital. Although new stock is issued, the cash raised by the sale becomes an Asset on the company's balance sheet. There's a good worked example in this Wikipedia article.
Following a rights issue the Liabilities of the company will increase to account for the increase in owner's equity, but the Assets will also increase by the same amount with the cash received.
Whether the stock price changes will depend upon what price the stock is issued at and on the market's opinions about the company's growth potential now it has new capital to invest. If the new stock is issued at the same price as the current market price, there's no particular reason to expect the share price to change. Again Wikipedia has more detail.
When new stock is issued it is usually offered to existing shareholders first, in proportion to their current holding. If the shareholder decides to purchase the new stock in full then their position won't be diluted. If they opt not to buy the new stock, they will now own a smaller percentage of the company as their stocks will make up a smaller part of the now larger number of shares.
New share issues via public flotations
Introduction
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 issue")
- Selling new shares to the general public and investing institutions
This revision note outlines the process involved in the third method above.
Methods
The process of a stock market flotation can apply both to private and nationalized 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, other advisors.
Why issue new shares on a stock exchange?
The following are reasons why a company may seek a stock market listing:
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.
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.
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 opportunities.
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.
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.
SECONDARY OFFERINGS
If a company has already issued shares, but wants to raise additional capital, or money, through the sale of more stock, the process is called a secondary offering.
Companies are often wary of issuing more stock, since the larger the supply of stock outstanding, the less valuable each previously issued share becomes. That's known as dilution.
For this reason, a company typically issues new shares only if its stock price is high. If it needs money, it may decide instead to issue bonds, or sometimes convertible bonds or preferred shares.
A company gets money from stock sales only when the stocks are issued. All subsequent trading means a profit or loss for the stockholder who sells, but nothing for the company that issued it.
A corporation’s first offering of stock to the public. IPO’s are almost invariably an opportunity for the existing investors and participating venture capitalists to make big profits, since for the first time their shares will be given a market value reflecting expectations for the company’s future growth.
The first time a company issues stock, it's called going public.
Going public, or taking a company public, means making it possible for outside investors to buy the company's stock. To go public, the management registers the stock with the Securities and Exchange Board of India (SEBI) and makes an initial public offering (IPO).
FROM PRIVATE TO PUBLIC OWNERSHIP
The road to public ownership often begins with an entrepreneur who has come up with an idea for a product or service and borrows enough money to launch a start-up business. If the company grows, the entrepreneur may be able to raise funds for expansion in the private equity market.
There, wealthy investors, investment companies, or other groups pool money — called venture capital — that they're willing to risk on a new business in exchange for a role in how the company is run and a share of the potential profits.
GOING PUBLIC
If a small company finds its product or service in great demand, it outstrips the ability of venture capitalists to provide money for rapid growth. That's when it decides to go public.
First, the management goes to investment bankers who agree to underwrite the stock offering — that is, to buy all the public shares at a set price and resell them to the general public, hopefully to great demand.
The underwriters help the company prepare a prospectus, a detailed analysis of the company's financial history, its products or services, and its management's background and experience. The prospectus also assesses the various risks the company faces.
ATTRACTING INVESTORS
The proposed stock sale is publicized in the financial press. The ads are commonly known as tombstones because of their black borders and heavy print.
The underwriters may also organize meetings between the company's management and institutional investors, such as pension or mutual fund managers. The day before the actual sale, underwriters price the issue, or establish the price they will pay for each share.
When the stock begins trading the next day, the price can rise or fall depending on whether investors agree or disagree with the underwriters' valuation of the new company.
SELLING DIRECT
Some companies may make a direct offering to investors, by selling shares in an online auction format. This type of offering may save money by eliminating fees paid to underwriters, and it may result in the issuer making more money from the offering itself. Companies who do an IPO this way still must meet the SEBI's filing rules.
One drawback of direct offerings for small companies is that they aren't followed by market analysts so that there could be limited knowledge about and interest in the offering. But that's not an issue for major companies who choose to go public this way.
When a public company issues new shares, the total number of shares traded in a secondary market goes up. Assuming there is no change in the fundamentals of the company and the profitability, I would expect that the share price of the existing shareholders would fall. However, this does not always happen in real life.
A company can only offer new shares if they have "unissued capital". Unissued capital is only a token restriction. When a company is incorporated a maximum number of shares is specified in the legal documentation. Most companies will make this an extremely large number so they never face that limitation. See here.
You wouldn't necessarily expect the stock price to change. The reason a company issues new stock is as a way to raise capital. Although new stock is issued, the cash raised by the sale becomes an Asset on the company's balance sheet. There's a good worked example in this Wikipedia article.
Following a rights issue the Liabilities of the company will increase to account for the increase in owner's equity, but the Assets will also increase by the same amount with the cash received.
Whether the stock price changes will depend upon what price the stock is issued at and on the market's opinions about the company's growth potential now it has new capital to invest. If the new stock is issued at the same price as the current market price, there's no particular reason to expect the share price to change. Again Wikipedia has more detail.
When new stock is issued it is usually offered to existing shareholders first, in proportion to their current holding. If the shareholder decides to purchase the new stock in full then their position won't be diluted. If they opt not to buy the new stock, they will now own a smaller percentage of the company as their stocks will make up a smaller part of the now larger number of shares.
New share issues via public flotations
Introduction
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 issue")
- Selling new shares to the general public and investing institutions
This revision note outlines the process involved in the third method above.
Methods
The process of a stock market flotation can apply both to private and nationalized 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, other advisors.
Why issue new shares on a stock exchange?
The following are reasons why a company may seek a stock market listing:
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.
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.
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 opportunities.
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.
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.
SECONDARY OFFERINGS
If a company has already issued shares, but wants to raise additional capital, or money, through the sale of more stock, the process is called a secondary offering.
Companies are often wary of issuing more stock, since the larger the supply of stock outstanding, the less valuable each previously issued share becomes. That's known as dilution.
For this reason, a company typically issues new shares only if its stock price is high. If it needs money, it may decide instead to issue bonds, or sometimes convertible bonds or preferred shares.
A company gets money from stock sales only when the stocks are issued. All subsequent trading means a profit or loss for the stockholder who sells, but nothing for the company that issued it.
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