In the new issue market, an investor’s decision is influenced by the following three factors
- Company’s ability for a good performance
- The underwriter behind the issue
- The method of distribution of shares
Company’s ability for a good performance
The investor will analyze the ability of the company from the point of view of
- financial capacity,
- economic independence,
- technical competence,
- efficient management; and
- market prospects.
Here, the debt-equity ratio of the company will be taken into account. The extent of the owned funds and the available borrowed funds will decide the financial capacity. It also takes into account the profit the company is likely to make in the course of its operations. The financial capacity of the company will be determined by its return to shareholders in the form of, dividend and the payment of interest on its borrowings. There are credit ratings given to the company by credit rating agencies specialized in this field.
The extent to which a company is able to stand on its own legs will decide its economic independence. The economic conditions prevailing in the country will also determine a company in achieving its break-even point. The earlier the achievement, the higher will be its degree of economic independence.
In the modem world, the extent to which a company adopts the modern technology will also influence its rate of growth. A company has to up-date its technology which may be available either within the country or outside. Otherwise, the company will run into technical obsolescence.
The management of the company should also be dynamic. It must foresee the changing trends and adjust its organizational set-up accordingly. To achieve this, an organization should always employ professional managers in its executive body. There should be a proper blend of both traditional and modern approaches to the management issues.
There should be a constant interaction with the market and also diversification in production. Products are likely to suffer the risk of obsolescence and the organization should be ready to make necessary changes in its marketing strategy. Different marketing strategies should be adopted to overcome competition.
The underwriter behind the issue
The reputation of the underwriter behind the issue also counts for the purchase of new shares. The confidence of the investor goes up when he finds a familiar underwriter, underwriting the shares of a new company. From the point of view of the company, the underwriter not only guarantees the sale of certain percentage of issue of shares but also takes those shares in case of short fall.
As per the law, a certain percentage of the shares newly issued should be offered to the public. Normally, the stock broker undertakes the sale of shares. Depending upon the reliability of the brokers, the sale of shares will take place. It is true that the newly promoted companies find it difficult to sell the shares through reputed share brokers and underwriters. So, there is a need for a special institution for the promotion of the new issue of shares belonging to newly promoted small companies.