The main function of a stock market, or a stock exchange, is to enable private limited companies to raise capital by selling their shares (a part of the company) to the general public (anyone in the world) in exchange for money (new capital injected into the business).
The stock market also provides a market for trading second-hand shares which have already been own by current shareholders of public limited companies.
The largest stock exchanges in the world include New York Stock Exchange, London Stock Exchange and Tokyo Stock Exchange.
The Initial Public Offering (IPO) process
Many owners of private limited companies decide to ‘go public’ by floating (selling) their shares on a stock exchange for the first time. This is known as an Initial Public Offering (IPO). Popular IPOs are heavily oversubscribed which pushes up the share price.
But first, before any private limited company can ‘go public’, it must obtain the necessary authority to sell shares to the wider community of investors.
Selling shares on the stock market in the UK
In the UK, if you want to issue shares, this can be done in the following way.
Obtain a listing on The Alternative Investment Market (AIM), which is that part of the Stock Exchange concerned with smaller companies that want to raise only limited amounts of additional capital.
The strict requirements for a full Stock Exchange listing are relaxed. Apply for a full listing on the Stock Exchange by satisfying the criteria of selling at least £50,000 worth of shares and having a satisfactory trading record to give investors some confidence in the security of their investment.
This sale of shares can be undertaken in two main ways:
a. Public issue by prospectus. This advertises the company and its share sale to the public and invites them to apply for the new shares. This is expensive, as the prospectus has to be prepared and issued. The share issue is often underwritten or guaranteed by a merchant bank, which charges for its services.
Here is how London Stock Exchange can support businesses through next phases of expansion.
- AIM. The world’s leading growth market for companies seeking to realize their growth potential.
- Main Market – Standard Segment. Core UK & European listing standards for equity and GDR issuers.
- Main Market – Premium Segment. The highest listing standards for the world’s leading companies.
- Issuer Services. As a London Stock Exchange issuer, your company can get access to a wide variety of products and services.
b. Arranging a placing of shares with institutional investors without the expense of a full public issue. Once a company has gained plc status, it is still possible for it to raise further capital by selling additional shares. This is often done by means of a rights issue of shares. Rights issue is when existing shareholders are given the right to buy additional shares at a discounted price.
Summary
Issuing shares on the stock market obviously gives private limited companies an opportunity to raise much more capital than from just the existing shareholders (usually family members and friends only). But, with the risk of some loss of control to the new shareholders.
