Imagine your company wanted to raise money to grow bigger. One option you might consider is a "new issue." But what exactly does that mean? Simply put, it's like selling fresh shares of your company to investors. Let's delve into what a new issue is, why companies do it, and how it all unfolds.
Why do companies carry out a new issue?
When a company wants to grow, it sometimes needs more money to expand its operations, like building new factories, hiring more employees, or developing new products. But where does this extra money come from? One way is through something called a "new issue" or "issuing new shares." Here’s how it works:
How does new issue work?
Let's break down how a new issue works using a simple example:
Imagine you own a toy company called Toy World, and you want to expand your business by building a new factory to make more toys. But to do that, you need more money than you have on hand. So, you decide to do a new issue of shares.
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- Proposal: First, the board of directors of Toy World writes up a proposal suggesting that the company issue new shares to raise money for the new factory.
- Decision: Next, the board presents this proposal to a meeting of shareholders or the general meeting. They discuss whether it's a good idea and vote on it. If the majority agrees, they decide to move forward with the new share issue. They also decide whether existing shareholders will have the first chance to buy these new shares (preferential rights) or if they'll be sold to anyone interested.
- Subscription period: Once the decision is made, Toy World announces a subscription period. During this time, existing shareholders and the public are invited to subscribe or apply for the new shares. They receive information about the new shares, like the price and how many they can buy.
- Allocation: After the subscription period ends, Toy World looks at all the requests for shares. If there are more requests than available shares, they may have to allocate them based on certain criteria, like how many shares each person wanted or if they were existing shareholders.
- Payment and registration: Once the shares are allocated, the buyers need to pay for them. Once they do, Toy World records this increase in capital with the appropriate government office e.g. the Swedish Companies Registration Office.
Why new issue is important to traders
New issues are crucial to traders because they offer a chance for gains and insight. Firstly, they provide a chance to buy shares at a set price before they hit the open market, potentially allowing traders to sell for a profit if the stock price rises post-issuance. Secondly, new issues signal a company's confidence in its future, giving traders valuable market sentiment cues. Moreover, they introduce volatility, which could be exploited by traders keen on capitalising on price fluctuations. Additionally, participating in new issues enables diversification, spreading risk across sectors or industries. Finally, they grant access to emerging businesses and innovative technologies, offering traders a chance to invest in high-growth potential ventures.
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Pros and cons of new issue
| S/N | Pros | Cons |
|---|---|---|
| 1. | Access to capital: New issues provide companies with a way to raise funds quickly for expansion, research, or other projects without taking on debt. | Dilution of ownership: Issuing new shares dilutes the ownership stake of existing shareholders, reducing their proportionate ownership of the company. |
| 2. | Potential for growth: With the infusion of new capital, companies can invest in growth opportunities, potentially increasing their revenue and profitability. | Price volatility: New issues could lead to increased price volatility in the company's stock as investors react to the issuance and its potential impact on future earnings per share. |
| 3. | Market visibility: Issuing new shares could raise a company's profile in the financial markets attracting attention from investors and potentially increasing liquidity in its stock. | Market perception: If not executed carefully, a new issue may signal to investors that a company is struggling financially or unable to fund its operations through other means. |
| 4. | Dilution control: Companies could use new issues strategically to maintain control and ownership by offering shares selectively or to specific investors. | Costs and complexity: The process of issuing new shares involves administrative costs and regulatory requirements, which could be time-consuming and expensive for the company. |
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