Background
When a company decides to float on the stock market they may wish to raise capital, gain access to debt funding, increase its liquidity, attract potential investors, become more competitive, raise its profile and improve corporate prestige. By floating on a stock market, a company will often increase its visibility to potential investors. Floating on the stock market allows the company to call on additional financial resources by selling off equity, to finance organic or inorganic growth projects.
At the same time, a company that floats may be subject to more stringent financial monitoring, transparency requirements, and other forms of investor protection. Shareholders who own shares in floated companies may be subject to different rules and a different investment outlook than those who invest in private companies, and their expectations may be very different.
Benefits
The greatest benefit of floating on the stock market is the access to a much larger pool of capital from which firms can draw down to finance their operations and projects. This in turn can give the firm the opportunity to expand or diversify their business, and to develop their operations domestically or internationally.
Companies that float on the stock market often have their share prices affected by their profitability, so investing in a floated company is seen as a long-term strategy rather than a short-term one. As a result, floated companies may be seen as more reliable and trustworthy, as investors have more faith that the company’s financial forecasts are valid and can be trusted.
This can, in turn, boost investor confidence, which can lead to greater institutionally and personally directed investment in the company and its share prices. This has added benefits in terms of company and brand recognition, as floated companies generate much more interest from the media, analysts, and overall market participants than their counterparts who remain privately owned.
Risks
Though floating on the stock market can be very beneficial in many regards, it can also bring with it some major risks. In the first instance, companies that choose the stock market route may suffer from decreased shareholder control, as their ownership can be broken up and dispersed, with no single investor having a controlling stake.
Secondly, when a company floats its shares, they become exposed to all of the market forces that influence the share price of a given company. This can result in sharp share price swings due to market news, which can have a major impact on the returns of investors, both positively, and negatively.
Finally, companies that float on the stock market often attract the attention of activist investors, who seek to take a very active role in the operations of the company to access returns for their own gains. This can mean a wide range of changes to the company, from management restructuring, division selling or product shifts, to the ‘greenlighting’ of particular investment projects.
Regulations
In most countries, listing a company on the stock exchange has a range of regulations and requirements attached to it, with failure to adhere to these regulations leading to sanctions from financial regulators or even de-listing from the exchange. These regulations, which typically involve financial reporting obligations and transparency requirements, can be complex and resource intensive.
In some countries, certain corporations may have dedicated listing departments to help manage the disclosure and listing obligations related to their stock exchange listings. However, in others companies will typically have to manage these obligations with limited corporate governance assistance.
Taxation
Raising capital on the stock market comes with financial implications and obligations in the form of taxes. Companies that raise finance by issuing stocks on the stock market will typically be taxed on any trading profits they make, as well as any profits that are attributed to the ownership of the stock.
In some countries, stock market taxation is differentiated from general taxation, and since tax implications vary from country to country it is advisable for companies to consult with legal experts in the jurisdiction in which they intend to float to ensure that any proposed listing will not raise tax burdens on the company or its shareholders.
Conclusion
Floating on the stock market is a common strategy for companies who are looking to raise capital, increase their liquidity, raise their profile and become more competitive. It is also a way for companies to access a much larger pool of capital from which they can finance their operations and projects. It is not without risks however, as companies that choose to list on the exchange can suffer from shareholder control issues, tax implications, and more stringent financial regulatory monitoring.
Incentives
In many countries there are government incentives to encourage companies to float on the stock market, which can include tax benefits and subsidies to offset the costs of listing. Incentives may also include increased capital allowances on research and development, or other tax incentives to encourage companies to invest in innovation, which may have a positive impact on recruitment and new technology development.
In countries that are attempting to improve the competitiveness of their business sector, incentives from governments may also include investment support or export promotion programs to help companies that wish to take part in international trade agreements.
Volatile Investment Instruments
When investing in floated companies, investors should be aware that the stock market is a highly volatile environment, and as such there can be significant risks associated with investing in these instruments. Investors should only invest what they can afford to lose, and should be aware of the risks of a total loss of capital in the worst case scenario.
Additionally, investors should be on the lookout for potential fraud or market manipulation, which can occur in the stock market and can cause investors to suffer loss of capital. Investors should also understand the tax implications of their investment, and employ the services of tax and legal experts to ensure that any investments they make are compliant with regulations in the jurisdiction in which they are investing.
Research and Knowledge
Before investing in stocks, investors should do their research. Understanding the fundamentals of the company you are investing in can protect you from potential market shocks. Additionally, understanding the longer-term trends in the market and your particular sector of investment can be helpful when trying to maximize your returns on a particular stock.
This includes researching the macroeconomic and international trends that could affect the long-term performance of your stock, as well as understanding where the company fits into the wider industry or market dynamics.
By researching a company before investing in it, investors can gain confidence in their investment decisions and have a better understanding of the risk-reward prospects of the company they are investing in.
Fundamental Analysis
When investing in stocks, it is important to understand the fundamentals of the company with which you are investing. Fundamental analysis can provide an insight into the financial health, operations and prospects of a particular company and help investors assess the potential returns of their investments.
This includes an assessment of the market dynamics in which a company operates, an assessment of the company’s financials, and an assessment of the company’s management structure and operations. Additionally, analysts may use financial forecasting to predict the performance of a company, which can be the basis for a company’s value when trading on the stock market.
Analysts may also consider qualitative factors such as customer opinions, brand power and competitor dynamics when making an assessment of a company’s stock. This allows investors to gain a better understanding of a company before investing and minimize their overall risk.
Technical Analysis
Technical analysis can also be used to identify potential entry and exit points of stocks and to better understand the overall market trajectory in which a stock is trading. This type of analysis looks at historical price data and volume data to identify patterns that may help inform trades and identify potential investment opportunities.
Technical analysis can be a powerful tool for investors, as it can highlight both where a stock is undervalued, overvalued, and where there may be opportunities to exploit sentiment or price inefficiencies. Additionally, technical analysis can help to identify support and resistance levels to minimize losses or maximize gains from trades.
It is important to note however, that technical analysis is not a foolproof system and should be used in conjunction with fundamental analysis for the best results.
