Even the world's largest businesses started out as tiny operations. Google was founded by two men at university, while Apple was founded by three people. Now, Google is worth almost £1 trillion and Apple is worth more than the entire FTSE 100.
In order to grow at scale, both companies joined the stock market to access investor capital. But, before we analyse why and when many small businesses list on the stock market, let's take a look at what the stock exchange actually is.
What is the Stock Exchange?
A stock exchange is essentially a large-scale auction. Investors will negotiate a price for shares in a company based on its performance.
In order to be listed on the stock exchange, a company must go through an Initial Public Offering (IPO). As soon as the stocks are public, people can buy and trade them. Investors will buy shares hoping the value of the company increases over time. If the company they invest in performs well, investors may also receive dividend payments.
In addition, those who are trading stocks and shares also have the opportunity to speculate on price movements, rather than buying stocks directly. To do this, they use a derivative product that takes its value from the underlying market.
Many traders operate when the market is at its most volatile, such as during earnings report season when share prices fluctuate as market sentiment adjusts to reports released by each business.
Speculative traders do not have shareholder rights and do not receive dividends, but they do have the potential to profit from both rising and falling markets by going 'long' or 'short'.
When Is the Best Time to List?
There's no set 'best time to list' on the stock market. The time that's right for your company will largely depend on what your aim is.
The best time for most businesses to join is when they can no longer achieve their goals through self-funding. If you're struggling to gain penetration in a new market or lack the cash to upscale, then listing may be a great chance to raise capital. Similarly, if your business is loaded with debt, then listing can generate significant cash, which you can use to pay the debt down.
Why list my business on the stock exchange?
Floating your company's shares on a stock market can allow you to raise additional finance. Floating also provides a market value for company shares. Company shares can then be used to fund an acquisition or as an incentive for employees.
Businesses join the stock market for a number of reasons, including:
- raising the company profile
- boosting credibility with customers
- appearing more attractive to lenders
- selling interest to new shareholders
- raising money
Although listing on the stock market has several advantages, listing isn't essential. For example, Danish toymaker Lego and confectionary giant Mars are both owned privately.
Remember, there are downsides to listing too. For example, public companies are at least partially publicly-owned, so you'll be held accountable to others and face more scrutiny. Similarly, the process of listing is expensive and time-consuming. Other potential downsides include:
- You will dilute your ownership and could even lose control of the business completely.
- There are extra regulatory requirements which you will have to comply with.
- There can be substantial costs and unexpected hidden costs associated with a market listing
- Paying shareholder dividends may negatively impact company cashflow.
So, if you believe in your business acumen and you're not desperate for funds, you may be able to go it alone.
Copyright 2020. Article made possible by Dan Hammond