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Flotation



Definition

Flotation, in finance, refers to the process through which a company raises capital by issuing shares to the public for the first time, often through an Initial Public Offering (IPO). It can also pertain to the issuance of other securities, like bonds. This allows the company to generate funds for expansion or other expenses without accumulating debt.

Phonetic

The phonetics of the keyword “Flotation” are /floʊˈteɪʃən/

Key Takeaways

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  1. Principle of Operation – Flotation is a method often used to separate particles based on differences in their ability to be wetted by water. It involves suspending particles in a solution, then introducing air bubbles, which adhere to selectively hydrophobic material and float to the surface where they can be collected.
  2. Applications – Flotation is widely used in industries like mineral processing where it helps to separate valuable minerals from ores. It’s also used in wastewater treatment to remove fats, oils, and other suspended solids.
  3. Efficiency Factors – Many factors can influence the flotation process, such as particle size, pulp density, reagent type and dosage, and pH level. Timing is also crucial as different materials require different flotation times to be effectively separated.

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Importance

Flotation is a crucial term in finance and business as it refers to the process of a company ‘going public’ – that is, issuing shares of the company to the public for the first time through Initial Public Offering (IPO). This process is significant because it allows a company to raise capital, diversify its shareholder base, increase its market value, as well as improve its public image. Further, from an investor’s perspective, flotation provides an opportunity to invest in the equity of the company and potentially benefit from its growth and success in the market. Therefore, understanding flotation is essential for both companies looking to grow and investors looking for profitable opportunities.

Explanation

Flotation, in the realm of business and finance, is primarily used as a method to increase a company’s capital by issuing new shares to the public. It is a process that provides a golden opportunity for companies to tap into the vast pool of investors for raising capital for expansion, paying off debts, or launching new projects. This mode of raising funds brings in not just significant capital, but also spreads the risk of business among large people, as the newly issued shares are bought by public investors.The functionality and appeal of flotation are not limited to only the businesses. From the standpoint of investors, the flotation process offers a chance to invest their money in shares of potentially successful companies. This can manifest as a beneficial proposition for both sides. Investors get the shot to increase their wealth by earning dividends, or through capital appreciation if the company performs well. On the other hand, it helps companies in receiving the much-needed capital for growth or settling their debts.

Examples

1. Initial Public Offering (IPO): This is a classic example of flotation where a privately held company decides to go public by issuing shares to the general public. For instance, tech giant Facebook Inc. opted for an IPO in 2012, which involved the flotation of its shares on the NASDAQ stock exchange. This enabled Facebook to raise billions in capital.2. Issuance of Corporate Bonds: When corporations need to fund large projects, acquisitions, or expansion, they might float corporate bonds to raise the necessary capital. For example, in 2017, Apple Inc. floated bonds for around $17 billion to finance their own activities such as share buybacks and capital spending.3. Flotation of Government Bonds: Governments also use flotation as a method of raising funds. For instance, the US Treasury Department regularly floats treasury bonds throughout the year to fund the government’s budget deficit. Investors who buy these bonds are effectively lending money to the government in return for periodic interest payments and the return of the bond’s face value when it matures.

Frequently Asked Questions(FAQ)

What is Flotation in the context of finance and business?

Flotation is the process of issuing public shares in a company for the first time to raise funds, typically through the stock market. It is also known as an Initial Public Offering (IPO).

How does Flotation work?

Flotation begins with the company hiring underwriters, who evaluate the value of the company’s shares and determine an initial offering price. Then, the company announces an IPO, and the public can start purchasing shares.

What is the purpose of Flotation?

The primary purpose of Flotation is to raise capital for the company to invest in its growth and expansion. Additionally, IPOs can increase the company’s visibility and credibility in the market.

Who can participate in Flotation?

Initially, institutional investors such as pension funds and mutual funds are invited to purchase shares. Following this, the shares are available for trading by the general public on the stock exchange.

What are the benefits of Flotation to investors?

An investor participating in Flotation gets an opportunity to buy shares of a company at its IPO price, often lower than its anticipated market price. If the company performs well, the investor can potentially secure considerable future profits.

What are the risks associated with Flotation?

While Flotation can provide great returns, it also carries a risk. The market price of the newly issued shares can fall below the initial offering price, leading to losses for investors.

Does every company go through Flotation?

No, not every company goes through Flotation. It is a decision made by the company’s owners and largely depends on whether they believe an IPO would be beneficial in achieving the company’s objectives.

What determines the success of a Flotation?

The success of a Flotation depends on various factors. The most important are the company’s financial health, growth prospects, the overall condition of the economy, and investors’ perception of the company’s value and future performance.

Related Finance Terms

  • Initial Public Offering (IPO)
  • Capital Market
  • Underwriting
  • Issue Price
  • Securities Regulation

Sources for More Information


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