Issue (Process): Explained
BY TIOmarkets
|July 29, 2024In the world of trading, the term 'Issue' holds a significant place. It refers to the process of offering securities in order to raise funds from investors. This process is a crucial aspect of the financial market, enabling companies to raise capital for expansion, debt repayment, and other business activities. The term 'Issue' is often used interchangeably with 'float', 'offer', or 'going public'.
Understanding the issue process is essential for both investors and companies. For investors, it provides an opportunity to become part-owners of a company and potentially profit from its success. For companies, it's a way to raise necessary funds without incurring debt. This article aims to provide an in-depth understanding of the issue process in trading.
The Issue Process: An Overview
The issue process begins when a company decides to raise capital by selling its securities to the public. This decision is often driven by the company's need for funds to expand its operations, repay debt, or finance other business activities. The process involves several steps, starting from the decision to issue securities to the actual sale of the securities to investors.
The process is regulated by financial authorities to protect investors from fraudulent activities. Companies must comply with strict regulations and disclosure requirements, providing potential investors with all necessary information to make informed decisions. The issue process can be a complex and time-consuming endeavor, but it's a vital part of the financial market.
Decision to Issue
The decision to issue securities is a strategic one, often made by the company's board of directors. This decision is based on several factors, including the company's financial situation, market conditions, and the potential benefits and risks of the issue. The company may decide to issue equity (shares), debt (bonds), or a combination of both, depending on its financial strategy.
Once the decision is made, the company must prepare for the issue process. This involves developing a business plan, financial projections, and other necessary documents. The company also needs to engage with financial advisors, underwriters, and legal experts to navigate the complex issue process.
Regulatory Compliance
The issue process is heavily regulated to protect investors. Companies must comply with the regulations set by financial authorities, such as the Securities and Exchange Commission (SEC) in the U.S. or the Financial Conduct Authority (FCA) in the U.K. These regulations require companies to disclose all relevant information about their business, financial situation, and the securities they plan to issue.
Companies must prepare a prospectus, a detailed document that provides potential investors with all necessary information about the issue. The prospectus includes information about the company's business, financial situation, management team, and the securities being issued. It also includes a detailed risk analysis, helping investors understand the potential risks associated with the investment.
Role of Underwriters
Underwriters play a crucial role in the issue process. They are financial intermediaries who facilitate the issue of securities by purchasing them from the company and selling them to investors. Underwriters assess the value of the securities, determine the issue price, and bear the risk of not being able to sell the securities to investors.
Underwriters work closely with the company throughout the issue process. They help the company prepare the prospectus, comply with regulatory requirements, and market the securities to potential investors. The underwriters' reputation and network can significantly influence the success of the issue.
Assessing the Value
One of the key roles of underwriters is to assess the value of the securities being issued. This involves analyzing the company's financial situation, market conditions, and other relevant factors. The underwriters use this analysis to determine the issue price, which is the price at which the securities will be sold to investors.
The issue price is crucial for the success of the issue. If the price is too high, the securities may not attract enough investors, leading to a failed issue. If the price is too low, the company may not raise the desired funds. The underwriters' expertise and judgment are vital in setting the right issue price.
Marketing the Issue
Underwriters also play a key role in marketing the issue. They use their network and reputation to attract potential investors. This involves presenting the issue to institutional investors, such as mutual funds and pension funds, as well as to individual investors.
The marketing process also involves roadshows, where the company's management team presents the issue to potential investors. The goal of the marketing process is to generate interest in the issue and ensure its success.
Investor Participation
Investor participation is a crucial aspect of the issue process. Investors are the ones who purchase the securities, providing the company with the desired funds. The success of the issue largely depends on the investors' perception of the company and the securities being issued.
Investors base their decision on several factors, including the company's financial situation, the potential return on investment, and the risks associated with the investment. They use the information provided in the prospectus to make an informed decision.
Subscription
The subscription is the process by which investors purchase the securities. Once the issue is open for subscription, investors can submit their applications, specifying the number of securities they wish to purchase. The subscription period usually lasts a few days, during which investors can submit their applications.
The company, along with the underwriters, reviews the applications and allocates the securities to the investors. The allocation process is often based on the demand for the securities, with preference given to large institutional investors.
Listing and Trading
Once the securities are allocated to the investors, they are listed on a stock exchange for trading. This allows investors to buy and sell the securities, providing liquidity to the market. The listing process involves complying with the regulations of the stock exchange and paying listing fees.
The trading of the securities begins on the listing day, also known as the debut day. The performance of the securities on the debut day and the days following it can significantly impact the company's reputation and the investors' perception of the company.
Post-Issue Activities
After the issue, the company has several responsibilities towards the investors. These include regular financial reporting, compliance with corporate governance standards, and maintaining investor relations. The company's post-issue activities can significantly impact its reputation and the investors' perception of the company.
The company must also use the funds raised from the issue responsibly. The use of funds is often specified in the prospectus, and the company is expected to adhere to it. Misuse of funds can lead to legal consequences and damage the company's reputation.
Financial Reporting
Companies that have issued securities to the public are required to provide regular financial reports to their investors. These reports include the company's financial statements, such as the balance sheet, income statement, and cash flow statement. The reports provide investors with an insight into the company's financial situation and performance.
The financial reports are often audited by independent auditors to ensure their accuracy and reliability. Companies are also required to comply with financial reporting standards, ensuring consistency and comparability across companies and industries.
Investor Relations
Investor relations is a key post-issue activity. It involves maintaining a strong relationship with the investors, keeping them informed about the company's activities, and addressing their concerns. Companies often have a dedicated investor relations team that communicates with the investors, organizes investor meetings, and manages investor queries.
Good investor relations can help maintain investor confidence and attract new investors. It can also help the company in future issues, as a strong relationship with investors can facilitate the issue process and ensure its success.
Conclusion
The issue process is a complex but crucial aspect of the financial market. It enables companies to raise necessary funds and provides investors with investment opportunities. Understanding the issue process can help investors make informed investment decisions and companies navigate the process effectively.
While the issue process can be a challenging endeavor, it's a vital part of a company's growth and success. With the right understanding and guidance, companies can leverage the issue process to their advantage, and investors can benefit from the investment opportunities it presents.
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