Going public and the dividend policy of the company

Going public and the dividend policy of the company

But some companies are not suitable for a full Stock Exchange listing and the Alternative Investment Market (AIM), setting up by the Stock Market Exchange in 1995, is a more suitable for unknown and risky companies.

Its main features are:

no formal limit on company size;

₤500.000 capitalization (full listing ₤3-₤5 million);

no minimum trading record (full listing five years);

10% of the equity capital must be in public hands (full listing 25%)

no entry fee is required, but a annual listing fee of ₤2.500 in year 1, rising to ₤4.000 in year three is payable.

Procedure for an Issue of Securities

All arrangements made by an Issuing House, which specialized in this work. The procedure would be probably as follows:

an evaluation by the Issuing House of the company’s financial standing and future prospects;

an assessment if the finance required, and advise regarding the most appropriate package to finance to meet the need;

advice of the timing of the issue;

agreement with the Stock Exchange on the method of issue (sale by tender, SE placing etc);

completion of an underighting agreement;

preparation of the prospectus and other documents required by the Stock Exchange in the initial application for the quotation;

advertising the offer for sell and the publication of the prospectus;

arrangements with the bankers to receive the amounts payable;

the issue price of the share to be agreed at a level to ensure a success of the issue;

final application for the Stock Exchange quotation, and signing of the listing agreement, which binds the company to maintain a regular supply of information to the Stock Exchange and shareholders.

Equity Share Futures and Options

These are traded at the London International Futures and Options Exchange (LIFFE), which was established in 1982.

Both futures and options are used by investors for:

hedging i.e. protecting against future capital loss in their investments;

speculation i.e. gambling on forecasts of favorable movements in future Stock Market prices.

The main differences between futures and options is that futures contracts are binding obligation to buy or sell assets, whereas options convey rights to buy or sell assets, but not obligations. Futures are agreed, whereas options are purchase.

Equity Share Futures

The only equity futures dealt in on LIFFE are those based on the FTSE 100 and MID 250 Stock Indices.

Futures contracts may b used to protect an expected rise in the market before funds are available to an investor. For example, an investor expecting a large cash sum in three months’ time could protect his position by buying FTSE 100 Index futures contract now, and selling futures for a higher sum when the market rises. The profit made on the futures position would then compensate him for the higher price he has pay for his investments when the expected cash sum arrives.

Equity Share Options

An option is the right to buy or sell something at an agreed price (the exercise price) within a stated period of time. As applied to shares, a payment (a premium) is made through or to a stockbroker for a call option, which gives the right to buy shares by a future date; or for a put option, which gives the right to sell shares by future date. And the holder may exercise the option, or late it lapse. However the giver (the ‘writer’) of the option, i. e. the dealer to whom the premium has been paid, is obliged to deliver or buy the shares respectively, if the option holder exercises his rights.

Traditional options have been dealt in for over 200 years, and are usually written for a date three month’ hence, when either the shares are exchanged, or the option lapses. The disadvantage of the traditional option is that it cannot be traded before the exercise date, and it was because of this inflexibility that the traded options market was created in the UK in 1978.

Equity options were first traded on LIFFE in 1992, and currently (1997), options are available on 73 large companies’ shares. Because traded options cost much less then the underlying shares, an investor is able to back an investment opinion without risking too much money.

II. Dividend Policy and Share Valuation