Wednesday, October 15, 2008

IPO - A Public Company is born (written by Daniel Kertcher)

When a private company reaches a point in it’s development that it requires an injection of capital to expand the business, then the directors have a couple of choices. One of the most popular methods is to FLOAT the company.

Floating, also known as Listing, involves taking a private company public to raise money for company growth and expansion. Members of the public as well as fund management institutions are invited to purchase shares in the Initial Public Offering (IPO).

The Prospectus

Before any company may solicit funds from the public, regulations require that it must draw up an offer document called a prospectus, which needs to be registered with the Australian Securities and Investment Commission (ASIC). This must present enough details and financial information on the company to allow a prospective investor to make an informed choice on the suitability of the shares for his or her portfolio.

The level of information that must be provided (which can often seem overwhelming to readers) is only one requirement that must accompany a listing application. Government consumer protection legislation is one consideration, but the stock exchange itself will have its own listing criteria. Such things as fees, required documentation, reporting requirements, size of the company and number of shareholders, etc. will all figure in a listing decision. For example, one requirement of the ASX is that a company has at least 400 holders of $2,000 each.

This sale of shares has occurred on the Primary Market. The money raised from the sale of shares has gone to the company to allow it to expand its operation. The new shareholders will want to see that the company is well run, professional and efficient. To do that, the shareholders will elect a board of directors to oversee the day-to-day running of the company. They do this by voting in accordance with the size of their shareholdings. This might result in, say, the election of a six-person board that selects its own chairman. Once a year, the board of directors must conduct an annual general meeting (AGM) to report to the shareholders on the company’s progress. Well in advance of the meeting, a copy of the annual report will be provided to all shareholders. All shareholders are welcome to attend the AGM’s.

Investors, particularly share traders, purchased the shares in the float with a view to selling them in the future to make a capital gain. They must therefore have a market at which to sell the shares. This is where the shareholders return once again to the stock market.

When the investor sells his or her shares, the money raised does not go to the listed company, instead, the money, minus broker commission (brokerage) goes to the investor. This is known as the Secondary Market. The Secondary Market is where the shares are traded once they have been purchased in the IPO.

This may seem staggeringly obvious; however, it raises an important point. Many people who invest in shares for the first time do not fully appreciate that the value of a company’s shares is not directly related to the performance of the company, or who the company is. Instead, the value of the shares is based on the public’s perceived value of the company. What Telstra does as a company is not as important as what
the public perceives the value of Telstra’s shares to be. There are many examples of companies that are very sound and well run, but are undervalued by the public. Alternatively, there are companies that don’t even produce profits whose share prices have skyrocketed. You only have to think back to some of the American Internet stocks such as Yahoo and Amazon.com for examples. These two companies had not even produced profits when they floated, yet their share prices rose incredibly fast, making the original owners billionaires literally overnight! It is this variance in share price and public perception that encourages share investors and allows them to make consistently high returns from the stock market.

The Bottom Line

The bottom line is that you cannot expect to be consistently successful as a share trader or investor by simply buying shares in companies that sound interesting. You must know how to investigate the company and to study the share price performance to determine which shares have the greatest potential to perform.

© Platinum Pursuits 2006. All rights reserved.

Disclaimer

The decision to invest or trade and the method selected is a personal decisions and involves an inherent level of risk, and you must undertake your own investigations and obtain your own advice regarding the suitability of our services for your circumstances. Platinum Pursuits Pty Ltd is an Authorised Representative (Rep. No. 286343) of Option Partners Pty Ltd, AFSL 298347.

Information contained in all Platinum Pursuits products and websites is intended to be general advice only and should not be relied upon as financial product advice. You are warned that:

1. The advice has been prepared without taking into account your objectives, financial situation or particular needs; and
2. Because of that, you should, before acting on the advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs; and
3. If the advice relates to the acquisition, or possible acquisition, of a particular financial product - you should obtain a Product Disclosure Statement relating to the product and consider the Statement before making any decision about whether to acquire the product.

Equities and derivatives trading involves risk, Investors need a broker to trade equities and derivatives, and must meet suitability requirements. Past results are not necessarily indicative of future performance. Investors are required and advised to request for and read the product disclaimer statements as provided by the particular profile they trade with.

None of the information and data contained in this presentation or the Platinum Pursuits websites (www.platinumpursuits.com or www.ppmember.com) nor any opinion expressed constitutes a recommendation to purchase or sell a security, or to provide investment or financial product advice.

The information contained on all Platinum Pursuits products is provided for general informational purposes, as a convenience to the customers of Platinum Pursuits Pty Ltd. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation. Consult the appropriate professional advisor for more complete and current information. Platinum Pursuits Pty Ltd is not engaged in rendering any legal or professional services by presenting this general information or by placing these or any general informational materials on their websites.

Platinum Pursuits Pty Ltd and its associates do not receive any remuneration (including commission) or other benefit from third parties by virtue of the advice provided.

Platinum Pursuits Pty Ltd is an Authorised Representative (286343) of The International Securities and Derivatives Group Pty Ltd ABN 22 103 552 683, AFSL 227544.

No comments: