How the stock market works

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2. Offers for sale

The process of listing for the first time is known as the 'primary market'. The most common way for a company to come to market is by an 'Offer for Sale'.

• The company publishes a prospectus describing its business, who its directors are, what its financial position is, and what profits it thinks it is going to make.
• The prospectus announces the issue of new shares, sets an offer price for the shares, and invites subscriptions.
• Offer prices are often pitched low to make sure the issue is successful.

Stagging

Low offer prices encourage investors to 'stag' an issue, applying for more shares than they want and selling them for an instant profit as soon as the market opens. Stagging was particularly good when companies only required payment after shares had been allocated. Now that they usually ask for money with your application, it's less attractive.

Nevertheless, stagging is still a feature of new issues, and you will see it cited as a factor in first day trading. Eg AFX's report on Zen Research said 'The hard disk developer finished the day up 27 from its flotation price of 150 pence to 177, having fallen back from an earlier high of 200 as traders stagged the issue. The stock was the second most traded on the smaller caps, with 22.46 mln transactions'.

Oversubscription

If an issue is oversubscribed, the company will usually allot each subscriber a percentage of the shares they wanted, and return a proportion of the subscription money.

Sometimes the offer stipulates that applications for large numbers of shares will be scaled back or rejected completely. This was what happened with the big UK privatisations, and investors who tried to get round the rule by making multiple applications in the names of children and pets ran the risk of prosecution.

Undersubscription

Most new issues are guaranteed by 'underwriters' - merchant banks who promise to buy any shares not taken up by the public, in return for a fee from the company. This gives the company the comfort of knowing their listing will get off the ground.

Occasionally, the underwriters have to act - as they did when BP floated in 1987 at the time of the crash. The underwriters had to take up huge numbers of unsold shares, at fixed prices, then offload them onto the market at much lower prices and absorb the loss.

1. Why do companies list on the Stock Exchange? 2. Offers for sale 3. Offers by tender, and other methods of admission 4. The Official List 5. AIM and OFEX 6. Different types of share 7. Reasons for market indices 8. The FTSE indices 9. Sectors 10. Scrip issues 11. Rights issues 12. Convertibles 13. Warrants 14. Share buybacks 15. Shareholder perks 16. Suspension 17. Insolvency 18. Conclusion

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