Floatation

Floatation of a company is comparable to setting a boat to sail for the first time. Term ‘float’ can be referred to as the number of shares sold by a joint-stock company through its initial public offering. These shares are issued by a company when going public for the first time. Bond issues are also termed as ‘floats’ when they are sold in finance markets. The float also refers to uncollected checks. The cost involved in issuing of the initial public offering is termed as ‘floatation cost’.

Floatation Cost

Cost involvement in making a public offering of shares or securities for the first time in the open market is known as ‘floatation cost’. The commission charged or earned by underwriters or investment bankers is also included in floatation cost. Printing, accounting, legal, and miscellaneous expenses are all included in floatation cost.

According to studies conducted by the Securities and Exchange Commission (SEC), floatation cost is relatively higher for stocks than bonds. Bonds are sold in volumes to a handful of investors, whereas stocks are distributed among a larger number of investors and sold fast. SEC has also discovered that floatation cost as a percentage of gross earnings is higher for smaller issues and less for bigger offerings. This is caused by higher fixed costs like legal expenses which get evenly distributed across the total number of offerings. The incremental fixed cost comes down proportionately to the number of public offerings. A right offering issue involves lesser selling effort and a low underwriting risk thereby minimizing floatation cost.

Underwriting Spread

Underwriting spread or underwriter’s commission is the main variable in floatation cost, which can vary between 1.25 per cent and 23.7 per cent. The commission determined by both negotiation and bidding is normally high for small issues and low for voluminous public offerings.

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