25 July 2022
Flotation IPO is the dispensation and selling of shares to general public investors. The term is popularly used in the United Kingdom. Through floating, companies can raise capital to obtain external financing to facilitate business expansion, support new projects, conduct research and development, and equipment.
There are numerous strategies for floating a company, as we shall learn below. Based on its needs and goals, a company may want to select the most feasible flotation method. Some flotation methods offer securities and valuation to private investors, while others trade securities on a public market stock exchange forum.
Companies can execute flotation through any of the following methods.
Companies can float shares by issuing an initial public offering. A private company goes public by issuing shares at a predetermined IPO price for the first time.
This method involves an investment bank that manages the underwriting process and analyzes the complete details of the initial public offering. These include the number of shares issued, share price, and the state of the IPO market.
Further, the investment bank is tasked with developing the investment prospectus needed for the IPO and embarking on a roadshow to advertise the new stock offering to potential investors before the first day of trading.
A private company can issue new shares by allowing existing investors to buy them before they are offered to the general public.
Private companies can execute flotation by issuing securities through an intermediary like a stockbroker. Here, the issuing of new shares is only available through private equity. Companies that opt for this flotation strategy are startups or must avoid issuing shares to the general public following high flotation costs.
In this shares issuance method, an intermediary purchases securities from an institution at a predefined price range and disposes of them to specific institutional investors or individuals. This method prevents companies from high flotation costs while enabling them to raise capital faster than initiating an IPO.
Stock market flotation is the total shares available to facilitate the trading of a particular stock. Low float stocks have the lowest number of shares. To determine floating stock, companies subtract deduct restricted stock and closely guarded shares from an organization’s total outstanding shares.
Closely guarded shares are shares that major stakeholders, insiders, venture capitalists, and employees own. Restricted stock is the insider shares that can’t be traded due to a temporary restriction like the lock-up period following an IPO.
A stock with more float is less volatile than its counterparts with small float because it is difficult to find a seller or buyer when fewer shares are available. Such a scenario results in lower volume and massive spreads.
A firm’s float is critical for investors because it suggests the number of shares available that the general public can buy and sell. Low float hinders active trading. Lack of trading activity can bar investors from entering or exiting positions in stocks with limited float.
Institutional investors usually avoid trading in organizations with low floats because there are fewer shares to trade. This scenario results in limited liquidity and broad bid-ask spreads. Institutional investors like the London stock exchange, pension funds, mutual funds, and issuance companies that purchase large segments of stock invest in organizations with larger floats only. Investing in such companies means their massive purchases will have a lesser impact on the share price.
Because floating stocks are the total shares available for the general public to trade in, they are prone to fluctuations. They are also affected by a wide range of conditions. Floating stocks are classified as low and high.
Stock floats are considered high if they have many shares available to the general public. For example, last year, Samsung Electronics Co.’s PLC can be considered high because a significant percentage of its total shares are available for trading. High stock floats also mean that investors have an easy time purchasing and selling these shares because they are not overly on demand. Institutional investors prefer high floating stocks, as we’ve learned above.
If a few stocks are available for the general public to trade with, they are referred to as low floats. This scenario can occur when many shares are closely guarded and restricted or when there are few investors. In this case, the share supply is low, making them scarce and pushing away investors.
A stock float may increase once a firm issues new shares to raise capital. It can also decrease when major stakeholders or insiders purchase shares and increase once they sell them.
When a firm initiates an IPO, it publicly avails its shares on the stock exchange. This process is also known as going public or flotation. IPOs help firms attract significant investors and raise capital using retained earnings or crowdfunding.
A lucrative initial public offering can raise massive capital, as when Alibaba floated shares on the New York Stock Exchange, raising more than $20 billion. IPOs incur significant costs and the firm involved has to adhere to its exchange’s compliance regulations and be suitable in the public eye. In this case, any float can be costly for businesses. However, traders can leverage a float to acquire company shares immediately after they become available in the stock market.
Before floating company shares, directors should determine the advantages and disadvantages based on their businesses. The advantages of floating include:
A successful IPO provides money the company can use in its development. A public quote also enables the firm to increase subscriptions and raise cash when required.
Initiating the IPO process raises the firm’s profile among other public companies, customers, and suppliers and boosts its reputation.
Listing on the secondary markets enables a company to provide publicly tradeable shares other than during capital market mergers and acquisitions. Often, sellers won’t accept private company shares as an alternative because they can’t be disposed of quickly.
The floating process is extensive and meticulous. Customers, suppliers, and investors are assured that the firm has the necessary systems, controls, and procedures to manage its operations.
Companies can motivate staff by granting them share options. Doing so encourages them to become more productive since the share price affects them directly.
Various flotation costs are affiliated with the issuance of new shares. For instance, numerous costs are incurred with legal, administrative, and underwriting fees.
The firm’s share price is subjected to macroeconomic factors like market fluctuations.
Issuing more shares diversifies a company’s ownership.
Public companies must maintain proper investor relations and publish their audited financial statements. Further, they are under pressure to maintain transparency of business operations.
When a firm goes public, it’s subjected to management restrictions and regulatory constraints to comply with the SEC.
Many successful private companies reach a point during their development where they consider entering the public market. Companies must answer the following key questions to ensure floating is the appropriate step.
Flotation comes with pros that firms can leverage to thrive. Still, it has some cons that companies must consider before going public. Are you considering floating your firm’s shares? Contact us, and our professionals will walk you through the process.
