How the stock market works
Introduction|
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Quiz |
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1. Why do companies list on the Stock Exchange?
The traditional answer is that private companies list on the Stock Exchange to raise capital and to provide a market in their shares. The owners give up part of their ownership in the company, and in return receive money to develop the business.
But within that general explanation there are lots of subtleties:
- A large family-controlled company may go public because its shares are split between hundreds of family members and there is internal pressure to provide a market which will allow them to cash in on their holdings.
- A company whose shares are already quoted may decide to spin off a division and list it separately because the market is confused by having the two divisions together (e.g. Dixons' decision to float Freeserve).
- A new technology company may list on OFEX because that particular market is suited to speculative ventures with no track record, and finance is not available anywhere else.
- A state-owned company may be privatised by the government because it has a political agenda to widen share ownership.
- An entrepreneur with a City following may list on the Alternative Investment Market (AIM) with a view to using the new company's highly rated 'paper' (i.e. shares) as a currency for acquiring other companies.
- An internet company may list because the mere act of listing provides it with valuable free publicity (e.g. internet companies found this useful in 1999 and early 2000).
The common thread of all these is that listing does provide a company with a separate public identity, and its shares will have some kind of recognisable 'value' because their price will be quoted on the market.
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