Subscribing for shares

This is how you express your interest in shares in 2021

When companies go public, investors can apply for them by subscribing for shares. Such new issues were a popular field of speculation, especially during the heyday of the New Market. Then for several years it was quiet about the IPOs, in Germany there has not been a single new issue with a volume of more than 5.0 billion euros since 2000. But abroad, with the IPOs of Alibaba, Facebook and others, there have already been some IPOs that even exceeded the volume of the late 1990s. You should know that if you want to subscribe to stocks.

Subscribing shares — this is how it works

Before the IPO, the company or the bank accompanying the IPO sets the issue price and the number of shares as well as the subscription period. Less often it can also happen that the new shares are auctioned, but usually there is a price range in which the security should be. Interested investors can now subscribe to the paper, which means that they bindingly express their interest in a certain number of shares and set a maximum price.

Private investors can usually subscribe for shares through their broker. The Consorsbank , for example, offers its own “Drawing” category. The security must first be selected there; only those that can currently actually be subscribed are displayed. In the second step, the number of pieces and the limit must be entered, i.e. the maximum price that one would like to pay. Of course, it has to be within the given price range.

When Sixt Leasing AG went public in May 2015, the price range was set at EUR 17.90 to EUR 21.30. For example, when subscribing for the shares, an investor can set a maximum price of EUR 20.00. If the subscription period has expired, all bids are viewed, the price is set so that as many shares as possible can be sold, but at the same time it is as high as possible. Lower bids will not be considered, higher bids will be served at the issue price.

If there is more demand than shares offered at the price, this is known as oversubscription. Then the corporation can either issue additional shares or some shareholders go away empty-handed. When Infineon AG went public, for example, the paper itself was oversubscribed 33 times at a maximum price. Therefore, only the first subscribers were taken into account, among them the shares were raffled.

When subscribing for shares, investors indicate how many shares they would buy at what maximum price. The bid is binding for the investor, but there is no guarantee that the shares will be received. The final issue price will be set in such a way that as many shares as possible are issued with maximum return for the company at the same time.

German private investors usually do not get a chance on new issues.

Subscribing for shares

Now we have described the theoretical process of how investors can subscribe to a stock. In practice, however, private investors usually do not get a chance on the primary market. As a rule, startups or companies sell their blocks of shares to large and institutional investors. On the one hand, it is easier to convince them to buy. On the other hand, they have a lot more capital available. After all, it makes a difference whether you have to convince thousands of individual shareholders or just a few large investors.

Subscribing for shares abroad

Of course, new shares are not only offered for subscription in Germany, but also abroad. For German investors, however, it is difficult to subscribe to foreign stocks because the issuing bank is also located abroad. Sometimes the issue is even restricted locally so that foreign investors cannot get a chance at all. However, as soon as the share is accessible to everyone on the floor or on a stock exchange, it can also be bought from Germany.

Opportunities and risks of a new issue

New issues were mostly highly oversubscribed, especially during the hype surrounding the new market. Those who were lucky and were allocated shares could often expect a significant price increase on the first day of trading; those who sold immediately had made a lot of money.

However, many companies failed to keep their promises in the long term; the majority were quoted below the issue price five years later. The course of the Facebook share was completely different . There the price collapsed after the initial listing, only gradually recovered and after a few months was again well above the issue price. Today Facebook is one of the largest companies in the world and the share is a must in almost every portfolio in the world.

So new issues do not offer guaranteed profits. Why should they, because of course the existing shareholders have an interest in achieving the highest possible prices. In principle, the price of the first listing is often well away from the issue price, which offers investors high opportunities, but also high risks.

When it is first listed, the price can deviate significantly from the issue price — but in both directions.

What investors should be aware of

As with any other stock, investors should carefully examine the paper before starting a new issue. Because there is no price data for the past, only the fundamental analysis is available here . Shareholders should therefore take a look at the price / earnings ratio compared to the competition. Then the competitive situation and future prospects have to be assessed. Are the price / earnings ratio and the future prospects in a reasonable relationship? Why is this company going to prevail against others = Other data such as the equity ratio complete the picture.

Shareholders shouldn’t forget the balance of power either. Is there a major shareholder and if so, do you trust them? In addition, the question must be asked why the IPO is now taking place. Does the company need new money to expand? Do the founders want to diversify their assets a little broader and are therefore selling some of them? Or should an unattractive company be quickly turned into cash here? The reason for issuing shares is very important. Investors should keep in mind that companies are offering new shares for subscription in order to receive fresh equity. An alternative to this is the procurement of outside capital, which is usually more expensive, as a fixed interest rate usually has to be paid. Anyone who subscribes for shares cannot fall back on a dividend history. But it makes sense

Investors should not only examine the fundamentals, but also ask about the reasons for going public. Because with an IPO, a company gets fresh money in the form of equity.

New shares with no subscription period

Subscribing for shares

Shares are not only issued for new issues; existing companies can also raise additional money with new shares. However, the procedure is then a little different. As a rule, old shareholders receive a subscription right, they can buy the new shares preferentially. The papers not acquired by the existing shareholders are then usually sold to large companies as part of a private placement, without the small shareholders being able to subscribe.

Even young companies often sell their shares over the counter to selected investors, such as venture capitalists. The IPO only takes place later, usually at significantly higher prices.

Share portfolio

Sometimes shares are simply given away, the so-called free shares . This usually happens as part of the spin-off and outsourcing of a part of the company. When Siemens spun off its subsidiary Osram in 2013, interested parties could not subscribe to any shares, unlike the spin-off of the semiconductor division under the name Infineon 14 years earlier. Instead, every Siemens shareholder was given one Osram share for every ten shares . The existing shareholders did not get any richer as a result, because at the same time the value of Siemens AG fell.

It is not always possible to subscribe to new shares; sometimes they are sold to existing shareholders, given away or only offered to large investors.

Subscribing for shares: pay attention to the fees

Subscribing for shares is one thing. The other is the fees that are incurred when issuing new shares. Of course, the fees vary from bank to bank. In the comdirect bank custody account, for example, issuing a new issue is free of charge. If the customer then receives a surcharge, the fee depends on the amount of the shares allocated. The costs are just as high as if the customer were to buy the shares on a stock exchange. Only additional costs such as brokerage fees etc. are omitted.

Conclusion: When drawing stocks, consider the opportunities and risks

The same applies to subscribing to shares as to buying them. Investors should weigh the investment critically and investigate whether the company is worth the money asking for it. You should not forget that particularly high price fluctuations are possible on the first few days of the listing, so subscribing to shares brings higher opportunities for short-term investors, but also greater risks. In addition to the risks, investors should also keep an eye on fees. Depending on which broker the trader is a customer of, there are more or less high fees for subscribing the shares.

Even if the company has been around for some time, the investor may only have limited fundamentals at their disposal. Depending on the stock exchange on which the stock corporation will later be listed, the company then has to publish more or less extensive balance sheet data on a regular basis. As a rule of thumb, it can be said that listed companies make their data available more transparently than unlisted companies.

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