www.InvestmentGuide.co.uk www.InvestmentGuide.co.ukShares A Beginners Guide to Making Money Contents
A Jot of people have made money out of new share issues. The City institutions which offer these shares to the market are keen that the shares should get off to a good start. For this reason they tend to fix the offer price slightly below their estimate of the opening market price. It is a very difficult exercise and it is not surprising that some of these issues are excellent value and become heavily oversubscribed.
Stags
Obviously, not all these people are long term investors. Many of them are what the market call stags. This is the term for a person who has no intention of holding the shares obtained in a new issue, but to sell them at a premium (an immediate profit) as soon as dealings begin. Stags became so numerous a few years ago and in some cases their charges so ferocious that the police had to be called to keep order. Many speculators have come to regard the game as not worthwhile.
However, you only have to complete the application form and post it off to stand the same chance as anyone else of getting some shares, even though it may be only a small number. The people who form the queues at the last moment are mostly representatives of stockbrokers and other financial institutions depositing applications on behalf of their clients or speculators who have waited to see how the market is behaving and having judged that the issue will go well are prepared to hit it with a large sum.
The market is full of surprises and there is always the danger that sentiment over an issue will change suddenly, possibly at the very last moment. By applying for more shares than you really want, or can afford, you risk getting landed with them and incurring a fearful loss.
The shares are usually advertised for sale in the Financial Times and other newspapers about five days before the closing date. The prospectus for the issue is published together with an application form. Copies of the form can also be obtained from the banks handling the issue.
All applications received by 10 am on the closing date are handled but if the offer is oversubscribed at that time the list is officially closed at one minute past ten.
When an offer is hugely oversubscribed the smaller applications are often subjected to a ballot so that the unlucky investor will not receive any shares. Applicants for a larger number of shares receive a proportion (sometimes a very small one, maybe less than 2 per cent) of the shares they applied for.
In order to curb abuses of the system the issuing house usually warns that multiple applications from the same person will be weeded out and rejected and that all cheques sent with applications will be cleared before any allotment is made. The aim of clearing the cheques is to discourage applicants from writing cheques for a larger amount than their bank account will stand on the presumption that the allotments will be scaled down.
If your application is scaled down to say 200 shares and the shares go up only a modest amount a large percentage of your profit will be taken by stockbrokers' charges when you sell and loss of interest on your stake money (which is normally much more than the shares allocated).
Tenders
Another way of putting shares on the market is to issue them for tender. This is the same as an issue for sale except that the price of the share is not fixed in advance, although a minimum price is usually stated. You have to give the price at which you are prepared to purchase the number of shares you apply for. Applications are then accepted starting from the highest price offered until the entire issue is taken up.
For example, supposing 500,000 shares are offered at the minimum price of £2 and applications are received as follows:
100,000 shares tendered for at £2.40, 100,000 shares tendered for at £2.30, 300,000 shares tendered for at £2.20, 200,000 shares tendered for at £2.10, 200,000 shares tendered for at £2.00.
In this case the issue is oversubscribed and the 500,000 shares offered would be allotted at £2.20 per share.
Obviously, tender issues offer less scope for the stags but this does not mean that they should be ignored. Most tender issues open slightly above the minimum price. Your best plan is to bid the price you think the shares are worth as a good short-term buy. You will not have to pay more and you may pick up a bargain.
Placing
Small issues of shares which are unlikely to raise much public interest are sometimes placed with city institutions or through a stockbroker to his clients. Sometimes these shares reach a high premium and it is worthwhile keeping an eye open for these issues. If you see an issue which attracts you contact your stockbroker quickly.
In offers for sale successful applicants receive letters of acceptance. If the shares are not fully paid, that is you pay the cost by two or three instalments, the letter will contain a timetable showing the latest dates when further instalments known as calls have to be made. It is important to put these dates in your diary as failure to pay an instalment on time may mean that the earlier payments are fortified.
Companies sometimes find it necessary to raise additional funds for general expansion or special projects. One way of raising the money is to issue new shares to existing shareholders for cash. This is known as a rights issue.
Obviously, the shares must be issued at below the current market price or no-one will buy them. However, an issue to the general public on preferential terms would upset existing shareholders so the offer is made to existing holders in proportion to the number of shares they hold eg one for one or one for two.
Shareholders may then decide whether to take up their rights by paying for them or selling their rights on the market, assuming that there is sufficient demand for them at the time to attract a premium.
A rights issue generally depresses the market price of the existing shares, because some shareholders are bound to sell their rights either because they simply cannot afford to take them up, or because they do not wish to increase their holding in the company.
Apart from providing a good investment opportunity a rights issue can also offer a chance to make a quick profit. A comparatively small rise in the price of the existing shares can mean a big rise in the price of the rights.
For example, if the existing ordinary shares stand at £3 and the rights are issued at £2.80 then one would expect the market price of the rights nil paid to be about 2Op. Assuming that the ordinary shares make a modest rise to £3.20 it follows that the rights would then stand at around 4Op. So, a rise of seven per cent in the existing ordinary shares is reflected in a 100 percent rise in the rights. Warning: the process works as well in reverse.
Last updated 19
January 2008.