What is the stock market for?

stock market

As we have already seen in our tutorial sheet N°1 to understand how the stock market works , the primary usefulness of a financial market is to allow companies to raise capital in order to develop and prosper… In return, investors can grow their savings by placing their money on the stock market and supporting the development of these companies…

What is an IPO?

The simplest form of public offering to understand is the IPO of a company…  The companies which decide to take the plunge are often those with a history of several years and which, by their development ambitions, come up against financing problems that the banks cannot always support… The idea is therefore to turn to the stock market in order to raise the capital necessary to finance their strategy by collecting several dozen , even hundreds of millions of euros.

What is an IPO for ? Companies come to the Stock Exchange to look for a way to develop, even to internationalize… Without “fresh money”, it is difficult for a company whose cash flow is too low to consider expanding its activities, even if it means leaving pass some opportunities…

Listing your group on the stock market can also be a way for managers to sell shares in their company and/or bring in strong partners who will accompany them for several years and support them in their projects…

Solicit savings can find other justifications: thus, one of the reasons frequently put forward by the leaders when they arrive on the stock market is a concern for notoriety… A listing is indeed a formidable means of making oneself known and constitutes the one of the most effective forms of advertising for a young company looking for more business exposure!

Finally, listing is also a good way to motivate its employees: for example, through “stock options” or free shares, a company can retain the talents necessary for its proper development and interest them directly to the smooth running of the business.

What is a capital increase for?

Second scenario illustrating the usefulness of the stock market, an already listed company can use the market to appeal to public savings via a capital increase or a fundraising… This operation voted on at the general meeting of shareholders can be used to finance a strategic acquisition, or to support a capital-intensive development project…

Why appeal to the market for a capital increase? For a company in financial difficulty, this can also be a new chance to get back on its feet to try to get back on the right foot… with reinforced equity and cash.

In concrete terms, how does that work? The company can  allocate to existing shareholders a negotiable right called “ subscription right ” or issue shares that can be acquired by new shareholders. The subscription right allows the shareholder to subscribe to new shares in proportion to the shares he already holds and to obtain financial compensation if the rights are not exercised. This system of preferential rights thus avoids the phenomenon of capital dilution on too many small shareholders…

In summary, capital increases are driven by listed companies to increase their equity through the creation of new shares . The shareholder most often has a preferential subscription right, which gives him the possibility of participating as a priority in the capital increase, even if the latter is not systematically forced to follow the operation, depending on his own investment strategy or current financial resources in the context of sound savings management

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