Ask Colin

Why don't some successful companies create more liquidity in their shares? Reece (REH) for example.

The stock market exists to mobilise capital. Investors want a good return on capital. Companies need capital. The stock market brings them together.

There are a range of companies on the stock market. Some of them need capital more than others. If you need capital, you need to create a liquid market and a good return.

However, if you have enough capital already, there is no imperative to create a highly liquid market. For a start, it invites raiders. For another thing, the bigger the share register, the more expensive it is to maintain.

So, why are these companies listed. The first motivation is usually to allow the owners some market for their shares and perhaps as an incentive for employees through share and option schemes. There are a range of secondary motives. The main one is that over time the company will grow and in doing so it will need more capital. As it issues more shares it will create the liquidity, which helps it raise more capital later.

One possibility is that the company could increase the liquidity by splitting the shares. This usually increases activity for several reasons. However it is also controversial. The most notorious opponent of this idea is Warren Buffett who refuses to split his shares. Despite this, the general view is that investors in each market are familiar with a range in which most share prices fall. Companies tend to split their shares to keep the price in this range. However, that is only a tendency. If trading increases, it adds costs in the share registry area and if the company has no need of additional capital in the short term, it may not see a benefit. Sophisticated investors are not influenced by the absolute price of a share.