 Hey guys, it's MJ, the student's act tree, and we're going to be talking about subject CT2 chapter 6, which is the issue of shares Now we've spoken quite a lot about what shares are, how their equity in a business and how you get dividends Which is a share of the profits What we're going to talk about now is more of the logistics or the mechanics of getting those shares onto a stock exchange And why someone might want to do that So the idea is that I've started my company. We're selling shoes I've got a couple of investors who gave me enough capital to buy the factory to get some Workers in and we're doing very well. We're making shoes. We're selling shoes and the business is growing when what we decide to do is we decide to go and get a quotation on the stock exchange and and what the quotation on the stock exchange means is that we're going to be taking our company from being a privately owned company and we're going to be offering it to the public and The reason why we're going to do this is that it's going to be easier for us to raise extra capital So if I've got an extra 10% of my company that I want to sell Instead of me going and calling up all my friends and saying hey, do you guys want to invest in this? What I'm doing is I'm listing it on a public stock exchange where millions and millions of investors are Looking at these charts and they'll be like. Oh, what is this new shoe factory? That's come up on the market. Let me investigate it Oh, wow, I'll be interested and when it's on the stock exchange Investor doesn't have to cough up the amount for the whole 10% But they can buy a fractional percentages like just a half a percent or a quarter percent They can take very smaller amounts, which means more people can invest in it and it's more likely to raise your capital So by going on to a stock exchange It makes a lot of sense if you want to raise extra capital as it does make it easier for the future issue of capital But now there are two other main benefits of going on the stock exchange The one is that it provides an exit route for your existing shareholders So let's say you had a shareholder He gave you a whole bunch of money to make the shoes and all that type of stuff But he's not that passionate about shoes He did it because he believed in you He saw the profitability and now it's been a couple of years and he wants to realize the return on his investment If you stayed as a private company He'd have to take his let's say as 20% He'd either have to sell his 20% back to you and you might not have the liquidity to do to make that purchase Or he might have to try find another investor and it'll be quite a bit of a hassle But by making it the the company listed on the stock exchange Like I said, there's millions and millions of potential investors who can now each buy a little bit of their 20% On say a daily basis on day one, you know He might sell 10% on day two He might sell the other 5% on day three. He might sell the rest and What it does is it makes this whole shares in his things marketable and Also, he now knows what the value is because he's letting the market decide If he just said, okay, I've got 20% of this company. How much is it worth? He'd have to do his own valuation and all this kind of things by listing on the stock exchange the market will be analyzing this company because their accounts will become public and Very quickly a price will be determined because if you list your stocks too low a lot of people are gonna buy the stocks and That's gonna drive the price up if you put the stocks too high Not enough people are gonna buy and the stocks are gonna have to come down in price So what's nice for the investors is that this provides a way for them to exit and It's an easy way to value what that share is worth Now what normally happens is Let's say my shoe factory has got this extra 20% that it wants to release on the stock market So the investors they're happy. They still want to stay with the company, but I want to just raise this new finance there's another 20% and I want to sell each percent at say a Million dollars. So I want to raise 20 million dollars. I Know that it's gonna be quite difficult for for me to raise all that 20 million and in one go And the last thing I want is for some shares not to be sold So what I do is I go to someone known as an issuing house and they will Underwrite the deal. So in South Africa, we've got a bank such as Investec and what they could do is What you do is you say to Investec or these issuing houses or an investment bank I'm selling all my shares 20 percent at 20 million if you underwrite it That means if not enough people come to buy it You guys will agree to take up the residual. So if we sell 18 percent You guys will complete the transaction by purchasing the other two percent and The issuing house will agree to do this on one condition that you then offer those shares at a significant discount So that if they have to provide the liquidity to complete the share purchase They can then sell it on the market and make profit very quickly and job that is How issues can be arranged by offering for subscription or buy a placing Now what I finally want to talk about are things known as a right issue and a script issue Okay A right issue and a script issue are very different things Okay companies can raise more money from the existing shareholders by offering them a rights issue a Rights issue reduces the share price and increases both the share capital and reserves of the company This is something that you don't really want to do Let's say you we've got our shoe company and we're making shoes and we decide We need money now We don't necessarily have to be on a stock exchange in order to issue a rights issue But you can if you're on it or not the idea is that we go to all our shareholders and we say Listen here guys We need more money So what they're saying is that we need each shareholder or for each percent of shareholder has to please contribute another Another million rent in this way we can raise then another hundred million Shareholders don't necessarily like this because it means that the company isn't making enough money by itself it needs help from a liquidity point of view and shareholders because they are all contributing and Their increase in the company doesn't exist So they if I own ten percent and then there's this rights issue. I pay the rights issue. I still have ten percent The reason why as a shareholder I'll do it is because I think to myself if I don't make this rights issue Then my shareholding is either going to decrease and if no one does it the company's not going to have the money and The factory is going to close down We're not going to sell any more shoes and all my investment that I put in has been lost So it's kind of for an investor. He kind of thinks I've invested so much money in this company already If I give just a little bit more it can keep it going although you can kind of see that there is a dark whole Possibility coming where you put a little bit of money in the company goes down You put in a little bit more money in to try to keep the company afloat and this is when investors sometimes have to make That tough decision of saying no this business isn't a good idea We're not going to invest the rest of the money. We're going to take the loss as it is But let's not in the the talk on such a negative note So let's talk quickly about something called a script issue So a company can use a script issue to increase the number of shares an issue without raising any extra finance a script Issue reduces the share price while keeping the total share capital and reserves unchanged It increases the share capital and reduces the reserves More basically what I'm trying to say is that let's say my shares are trading at 20 20 random share for my share factory. I can then go and issue another or double the amount of shares and reduce the price back down to 10 random and The reason for doing this it doesn't there's no financial Sense to doing it. It's more. This is more where psychology gets involved and behavioral finance takes a play but people tend to like shares trading at a certain price range and Also, it shows a lot of confidence. It says well look our share has risen so much We had to do a script issue in order to artificially reduce the price So what happens from an investor point of view is I might have one One share at 20 round after the script issue. I'll have two shares at 10 round each So I've still got the same amount of shares. Well, no, sir. I've got double the amount of shares But I've still got the same percentage overall and I've still got the same amount of money in the company a Final thing that they might do which does actually add value is something known as a script dividend What happens here is instead of paying Cash in dividends are saying here's a share of the profit the company might say well Here's some more shares. We're gonna be releasing more shares and we're gonna reward the shareholders by giving them more shares Some investors might prefer this because they might say well this company's going places I don't have to reinvest my dividend. I'm gonna get the compounding growth effect on it This is great other shareholders might say no I actually need the liquidity and so it would have been better for me to get a dividend What further complicates this whole process is that various different tax laws could mean different tax benefits For the different types of cash flows You might be taxed more on a cash dividend than a script issue all the other way around so a script dividend and John that is that is chapter six the the issue of shares Feel free to to comment in the comment section below and ask any questions and Stay subscribed as we make some more videos on chapter seven. Thanks guys. Cheers