Money Tips Network

New issues are one of the most exciting parts of the stock market. Not only do they allow investors to spot the successes of the future at a relatively early stage, they are also a direct means of providing capital for industry. Obviously, the daily buying and selling of shares – known as the secondary market – is extremely important. Without the knowledge that their shares could easily be sold, investors would not subscribe for new issues. But it is new issues – and the subsequent capital – raising exercises for expansions and acquisitions – which provide the main economic argument for The Stock Exchange’s existence.

Since the Financial Services Act was implemented in 1988, there is no real forum for trading shares outside The Stock Exchange. However, there is at least a choice of three tiers for companies wishing to float – the main market, the Unlisted Securities Market (USM) and the Third Market.

There are different rules of entry on the different tiers. For a full listing, the company will need to have a five-year trading record and at least 25 per cent of its shares in public hands. On the USM, the trading record can be only three years and the proportion of shares in public hands falls to 10 per cent. On the Third Market, only one-year’s trading record is required ant there is no minimum percentage of equity that needs to be in public hands.

Certain banks and stockbrokers specialize in bringing companies to market and the name of the sponsoring house may be very important in ensuring investors’ confidence in the issue. The sponsor will also advise on the timing and the terms of the issue. After Black Monday, for example, several companies withdrew their issues, on advice from their banks or brokers, until the stock market was more settled. When they returned, they were able to raise less money than they had originally planned.

There are a variety of methods by which a company can join the market. If the company is particularly large – like British Telecom or Eurotunnel – it will make an offer for sale. This is the most expensive method of making a new issue since it requires a large amount of publicity and also the underwriting of the offer by institutions. Underwriters guarantee, in return for a commission, to buy shares if no one else will. When issues go well, and investors flock to buy them, it sometimes seems as if underwriting is money for old rope. But the British Petroleum issue in late 1988 illustrated that a poorly-received offer can cost underwriters millions of pounds.