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Hi John, this is a purely out of general knowledge question and I would most appreciate it if you could help me clear my mind
What I have read when a private company goes public, it raises IPO (inital public offering) with the help of an underwriter (investment banks). THe bank then buys the shares the company is willing to offer to the public. Then, the banks start trading the company’s stock on the stock exchange.
I have a few questions-
Q1) Does the company get the money only from initial public offering ( the price the underwriters pay to company? Does it not get moeny from the stock trading occuring as different people are buying at different prices.
Q2)How do they issue more shares later in time, is it on stock exchange?
Q3) When a member of public buys a company share at $10, and the nominal value is $2, the extra $8 goes to share premium account?Lastly, I was told that company does not get affected by trading? WHy is that Sir?
Please clear these for me and I shall be grateful to you
THanks a ton
I will answer briefly, but virtually none of this is relevant for Paper F3 (it is paper F9 🙂 )
The main function of the stock exchange is for shareholders to buy and sell shares to each other. If I own shares in a company and want to sell them, it is not easy for me to go searching for someone to buy them. So I use the stock exchange where the dealers have lots of people wanting to buy and to sell. Me selling my shares to you does not affect the company at all – whatever price I end up selling them at – except that in future they will pay any dividends to you instead of to me.
If a large company wants to issue new shares then they will usually do it via the stock exchange (although they do not have to). For the new shares they say what price they are selling them at and hope that people will buy. Investment banks will help them (by, for example, advising them on a sensible price to charge). All underwriters do is guarantee that if some of the shares are not sold then they will buy them – it is a bit like insurance and it means the company is guaranteed to sell all the shares (whether it is to new shareholders or whether it is to the underwriter). But like insurance they have to pay a fee for this.
If the company wants to issue more shares later, then they can do it again through the stock exchange, but more often they will have a rights issue (which is in Paper F3 and is explained in the free lectures) – in that case they do it by writing directly to the existing shareholders and offering to sell them new shares.
The share premium account is only affected when shares are first issued by the company at a price higher than the nominal value. Again, if later one shareholder decides to sell their shares to another shareholder, then that is nothing to do with the company and does not affect them.
Thank you so much Sir
When they issue new shares at the stock exchange, won’t they issue them at the market price rather than setting out a new price?
If a large company wants to issue new shares then they will usually do it via the stock exchange (although they do not have to). For the new shares they say what price they are selling them at and hope that people will buy. Investment banks will help them (by, for example, advising them on a sensible price to charge). All underwriters do is guarantee that if some of the shares are not sold then they will buy them – it is a bit like insurance and it means the company is guaranteed to sell all the shares (whether it is to new shareholders or whether it is to the underwriter). But like insurance they have to pay a fee for this.
For this part is it INITIAL PUBLIC OFFERING
And the price which is determined by the investment banks are usually fixed right? Like if the company wishes to raise capital, they can issue 10,000 and $2. So they get the 20,000. Now whatever, the shareholder wish to do they can buy or sell.
Most likely if they already have shares in issue then they will issue the new shares at the current market price.
Issuing new shares for the first time on the stock exchange is an IPO.
The investment banks do not determine the issue price – the company determines it (the investment bank is simply an advisor and advises).
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