Money Tips Network

Once the underwriting is arranged, a company will issue a prospectus setting out in very detailed form its structure, trading record and prospects. The prospectus must appear in at least two daily newspapers. Investors are then invited to apply for shares by a certain day. On the day that applications close, the sponsor counts up all the offers and then announces whether the issue is over- or undersubscribed. If oversubscribed, this means that investors have applied for more shares than there are on offer; either their applications will be scaled down or there will be a ballot, in which only a few will get shares. If the issue is undersubscribed, the underwriters will have to buy the shares at the offer price.

In a conventional offer, investors are told the share price in advance; in a tender offer, they pick the price themselves (although a minimum price is usually set). When all the tenders are in, the highest will be awarded shares, then the next highest and so on down until all the shares are allocated.

Tenders are unpopular with institutional investors, since they reduce the chance of an increase in price (premium) when the shares start trading. Private investors also are not inclined to apply for tender offers. As a result, tenders are comparatively rare and only tend to be used when an issue looks certain to be popular.

A placing is by far the most common, and also the most prosaic, means by which a company joins the stock market. The sponsoring bank or broker contacts key investment institutions and asks them to take some shares; individual investors are unlikely to be approached. The placing method is cheaper than an offer for sale and tends to ensure that the shares are held in the hands of a few, supportive institutions.

The success of all these new issue methods depends on setting the right price for the shares. The higher the price, the more money flows into the company. But the sponsor will not want to set the price too high, for fear that it will fall when dealings commence. The ideal is a modest price rise on the first day. That reflects will on the company and pleases the shareholders – in the long run that will be better for the company than squeezing the last penny out of the issue price. The sponsor’s problems in setting the price will be exacerbated by the presence of stock market investors called stags, who are eager to make a profit out of new listings when the price is set too low.