Stock exchange lingo in layman’s terms: Part 2

 In the second part of this series, we’re going to delve deeper into the world of Wall Street, the Johannesburg Stock Exchange (JSE) and share some of the common jargon you might hear on the daily bulletin news bulletins.

Initial public offering (IPO)

Let’s say for example you run the biltong shop in the city. It’s been around for a while and has a growing customer base by word of mouth. However, now you want to open more stores to become a national franchise. For this you will need more money, because you need to lease new shops, hire new staff, buy more meat and spices.

There are several ways you can get more money to grow the business: a bank loan, maybe a loan from the government, ask friends and family, crowdfunding or an IPO.

An IPO means you are going to take your private ownership of your biltong shop and list on a stock exchange, such as the JSE in Johannesburg. When your biltong company is listed on the JSE, then the public can buy shares, which are little pieces of ownership, of your biltong shop.

For example, if a company issues 100 000 shares at R10 and they are all sold at the price on the first day in an ideal world, the company will now have R1-million (100,000 x R10) to spend on what it needs to become a franchise.

If you want to remain in control of your biltong shops after your IPO, you have to become the majority shareholder. The more shares you own, the more say you have in how the company is run, because shareholders vote on the direction companies take, among other things.

It should be noted that becoming a publicly-listed company on the JSE is generally a lengthy and sometimes cumbersome process only bigger companies ever consider, partly because of the costs of complying with all the regulations involved.

For example, one of the steps in creating shares in your company is that someone has to underwrite these shares. This means someone is taking on the financial risk of what you are going to offer, often investment banks; but before they are going to do that, they are going to analyse your company extensively. They might also do some of the legal work involved to meet the requirements of financial regulators and the JSE itself. In turn, the underwriters are allowed to sell some of the shares of your biltong shop first to its clients.

But why would underwriters such as investment bankers do that? Why would you go through all this labour to help you raise money for your biltong shop? One of the main reasons is the commissions. When they sell you shares, they earn a commission on those shares.

In our example, we’re talking about R1-million. This is pocket change compared to most IPOs. For example, here are some of the largest IPOs in history adjusted for inflation:

• NTT Mobile: R428-billion
• Saudi Aramco: R386-billion
• ENEL SpA: R381-billion
• Alibaba: R357-billion
• SoftBank Corp: R330-billion.