Advantages of Alternative Investment Market - Essay Example

Advantages of Alternative Investment Market (AIM)

Generating Cash

Funding small businesses is normally termed as a risky activity for investors and the start-up ownership. Funding a business model involves the research into the markets visibility as well as the feasibility of the market at hand. With Alternative investment market, one advantage to small businesses is that they can list to trade shares to generate financial resources for expansion or acquisition of equipment among other resources/assets (Growth Business, 2010). The need for funding for a small business may be associated to changes in the marketplace as well as the competitiveness of the industry at hand. Thus, the small businesses require cash to ensure that short-term needs are taken into account and financed appropriately. However, instead of taking loans, these companies sell a stake of the company using the common stock to acquire the initial investment money required (Monevestor, 2009). The advantage of this approach is that the company acquires the needed cash to either expand or adapt to changes such as in information systems’ adaption. Information systems for contemporary organizations are essential inputs that ensure a company runs more efficiently. In addition, the costly work that would require millions to get done through manual approach is avoided and significant savings made from the adaption of information systems. To maintain and upgrade these systems, also serve as an example, higher costs are required that start-ups may not be financially prepared for (Monevestor, 2009).

By acquiring the needed cash for expansion and financing of other direct inputs to the business gives the company a financial elevation until the investment fund starts to generate returns. Since the listing of companies for the selling of shares, it is observed that these companies trade their goodwill with investment funds. Therefore, by listing, the company is made public and its reputation among various stakeholders is gained. However, in terms of risk management, the nature of the business allows shareholders to bear part of the financial risk associated with the uncertainty of the financial markets (Monevestor, 2009). If for instance, the company shares trade a poor price, the decreasing value of the company would not affect the company’s financial power only, but also the value of the shareholders’ investment such that the net worth of equity is proportional to the stake held at any given financial period or event.

Company Profile at IPO

Listed companies in the UK are expected to be more transparent since they are public in nature. Transparency through the policy requires the companies to report their performances while at the same time being scrutinized by various agencies to ensure their operations are authentic and observing the law. Through the inside-out scrutiny, the company’s profile is made available to the public who must use it to make the decision of whether to invest with the company or not. Therefore, the company’s profile enables its operations to be assessed without cover-up (Growth Business, 2010). As a result, more investors are made available once the company profile is appealing. In addition, the previous financial and performance records also communicate to investors whether or not the company has the propensity to be profitable and sustainable. Due to information asymmetry, managers, trade company shares with reference to the poor knowledge of the investors. Although the economic theory suggests that freely available information is not valuable, it is observed that a transparent approach into a company’s financial and operational performance gives investors a general view of whether the company’s practices are financially beneficial or they are economically depressing the firm’s performance (Growth Business, 2010).

Production companies make use of supplies either by selling them or by acquiring them for other corporate use. Companies must have reasonable relationships with suppliers within the market. As a result, the companies that produce and those that supply face the same challenges within the market. If the financial market fell considerably low on the exchange rates, both suppliers and business owners would be significantly and negatively affected (Monevestor, 2009). These considerations are mostly suppliers’ and provide listed companies as each companies to deal with due to transparency as well as market positioning. Thus, the benefit of AIM is to enable easy and trustworthy relationships with customers and suppliers who have a direct influence on the operations and, most importantly, the financial growth of the company (Aloysius, 2007).

Provision of Share Options

Employee stock options are privileges extended to the employees such that common shares of the company are allocated to the employees such that bonuses based on company profitability can be afforded. The option gives the notion that employee would own a stake of the company and also dispose of it when they want. However, the reality of employee stock option is that it serves as financial incentive associated with every positive development. Since employees cannot sell their stake of the shares, theirs is to ensure that the share prices do not fall to a level where no bonuses can be afforded. The creation of morale among the employees relates to the shareholder expectations that the value of their investments must grow substantially. On the other hand, if the share prices grow considerably, the company offers the employees bonuses that reflect a proportion of the growth (Aloysius, 2007).

In order to ensure that incentives associated with share options to employees are regular and at the same time sustainable, a company must play an outstanding role of ensuring that its operations can guarantee the financial bonuses associated with AIM listing. Since the company is run by employees, it is their role of ensuring operations meet the quality and supply demands to sustain positive growth (Aloysius, 2007). The benefit of the share options strategy is boosting employee morale to ensure that each individual effort is directed towards loyalty to the company and also resulting to a higher retention rate for managers who count training and development as a significantly costly exercise.

Management Assurance

The maximization theory suggests that managers work towards gaining their interests buy bargaining for the best quality at the least price and trading the available products and services at prices that meet the total estimated value of the product. Through these approach, managers are able to create surplus for refinancing other sections of the production line. However, prior to the listing in an AIM, the existing companies must go through rigorous exercise of finding out whether the company would be managed appropriately. The investigations are carried out to ensure that the need for power does not influence management to consider unethical accounting and financing practices. To customers, suppliers, employees, and shareholders, the initial and subsequent scrutiny assures them of the company’s stability and potential performance (Growth Business, 2010).

Expert analysis of a company before listing offers the target investors with a clear picture of how the company intends to carry forward with its business operations and how it also looks forward to spending investment funds to generate value. To shareholders, the investigations carried out to authenticate the validity of a company’s bid for listing serve as guarantees that the risks involved can be resolved satisfactorily and cases of negative growth also affect every stakeholder rather than individuals. The company and the shareholders are jointly entered into business through the listing and exchange of goodwill with investment support (Sapphire Capital Partners, 2014). To investors, company’s entering into an IPO are better placed for financing unlike their counterpart private companies whose accounting practices are not disclosed for scrutiny. In addition, management practices in private companies are rarely publicized which serves as reason why investor confidence on unlisted companies is poor. Better investor confidence by the listed company opens more opportunities of raising the desired financial burden (Sapphire Capital Partners, 2014).

Low Initial Share Prices

To small companies, initial share prices are affordable by a majority of low to medium income investors. As a benefit, the low prices of shares enable the generation of higher interest in the shares by the target investors. Since a small company will have a considerably small capital, the traded shares under AIM also represent a small value of the company at the IPO (Aloysius, 2007). Financial events which may hurt the company’s share prices and the overall financial health of the company are responsible for causing minimal losses to buyers of large volumes of shares. However, it is observed that most start-up listings under the AIM have a great financial propensity within the market, hence, the low share prices’ strategy is not only a financial strategy to minimize damage, but also a business strategy to commit to economies of scale to raise the amount fast while at the same time covering a possible large proportion of the investors (Aloysius, 2007).

To investors low share prices serve as enabling approach to investment. Too expensive shares signal highly profitable or financially secure company such as heavy duty industry and most investors choose cheaper shares as they can afford them. Due to affordability, AIM investment enables investors with considerable amount of funds to invest with in order to become part of the business ownership (Sapphire Capital Partners, 2014). The affordability of the shares show that the company is a high risk company due to the fact that it’s share prices are highly volatile to financial market dynamics. Among the financial market dynamics affecting share prices include changes in exchange rates, decrease in shares traded, changes in traded volumes, and performance against the industry (Growth Business, 2010). However, since a start-up business would only consider AIM if it has a potential for growth, the share prices are mostly expected to trade at a higher price as time progresses. For instance, if the company is growing at a 10% rate in value, the share prices would also trade at a higher price due to the growth factor. However, if the company did not grow positively, inflationary changes would not be accounted as value created as it would be adjustment to time. Therefore, for potentially feasible investments under the AIM, low prices for traded shares promote economies of scale and an opportunity for creating value.