Floating and listing
A company lists on the stock exchange by undertaking an initial public offering (IPO), a process commonly known as a 'float'. Going public is one way for a business to access funds to help it grow.

Alternatively, the existing owners may want to sell part of their interest in the company or even exit completely.

You can find out more about a company and its prospects from the prospectus it's legally obliged to provide. If you like what you read, you can apply to buy shares by completing the attached application form.

However, if a listing is a popular one, you may not receive all – or even any – of the shares for which you apply. Your application will be 'scaled back' and you'll be sent a refund.

Some smaller or highly prized floats are only available if you're a client of a broker who receives an allocation.

New shares in floats are offered to the public at a set price. But once the shares begin trading on the stock exchange their price is determined by demand in the 'secondary'  market.

If other investors think a company has good prospects, they'll be prepared to pay more for its shares; if it falls short of the forecasts in its prospectus, they'll be looking to sell – driving the price down.

In the past, some investors have achieved 'stag' profits from popular floats – buying up shares then selling them for a big profit on the first day of trading to the queue of investors who missed out on an allocation.

Not all floats are successful, however. It's vital to read the prospectus carefully to understand the company and its business. You should apply the same investment criteria as you would when deciding whether to buy the shares of a company that's already listed.

The initial sale of shares to investors in a float is what constitutes the 'primary' market; the buying and selling that goes on later is the 'secondary' market for those shares.

Once listed, a company can raise additional equity capital by issuing more shares through processes such as rights issues and 'private' placements. Dividend reinvestment plans and company options are other ways that new shares find their way into the marketplace.

Rights issues
A rights issue involves the issue of ordinary shares to existing shareholders on a pro rata basis – that is, in proportion to the shares they already hold.

For example, a 1-for-5 rights issue involves one share being offered to investors for every five shares they already hold (up to a cut-off date known as the 'ex-rights date').  In this example, if a company with 50 million shares on issue wanted to raise $10 million, it could issue 10 million rights at a subscription price of, say, $1.

Shareholders don't have to take up their entitlement in a rights issue, but the price will be set a discount to the prevailing market price for the shares to encourage them to do so.

Rights issues may be either renounceable, in which case shareholders can sell their 'right' to the new shares, or non-renounceable, which means they can't be sold.

Details of the rights offer will be set out in a prospectus that specifies the issue's terms, subscription price, subscription date and ex-rights date.

The rights will lapse if they aren't exercised on the subscription date.

Typically, a company's share price falls after the ex-rights date by an amount reflecting the value of the rights.

Private placements involve the sale of a large block of new, ordinary shares directly to selected investors – usually financial institutions, such as fund managers.

They involve a minimum subscription of $500,000 to not more than 20 participants.

From the company's perspective, the advantages of a private placement are that it's quicker than a rights issue, it should involve less of a price discount, and a prospectus isn't required.

Dividend reinvestment plans
A dividend reinvestment plan (DRP) gives shareholders the option of reinvesting their dividends in new ordinary shares.

Companies that have DRPs available usually offer a small discount to the market price for shares taken up in a DRP.

These plans don't raise large amounts of equity but are flexible in the sense that they can be suspended when further equity finance isn't required and reinstated when needed.

No brokerage or stamp duty is payable on share purchases made through DRPs.

Company options
Company-issued share options (not to be confused with 'exchange-traded' options) provide the right but not the obligation to buy ordinary shares at a set price at a future date.

When they are exercised (indeed, if they are exercised) they result in the creation of new shares, with the result that the company collects fresh equity funds from the person taking up those shares. (Options traded on the ASX market don't result in new shares being created – they are options to buy or sell existing shares.)

Whether company-issued options are exercised will depend on whether the exercise price is less than the market price of the shares at the exercise date.

Questions to ask while reading the prospectus for a float:

  • Does this investment suit my risk profile?
  • Does it fit my investment strategy?
  • Are the shares being offered at a reasonable price?
  • Do I understand this industry?Do I understand the business?
  • Why is the company listing?Is the management team experienced?
  • Are the owners and management staying?
  • What assumptions are built into the financial forecasts?