Why Do Companies List - In My View


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The third article in the "In My View" series. Please feel free to leave a comment.

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Why Do Companies List - In My View

  1. 1. Why Do Companies List – In My ViewIf you are someone who is “in touch” with the financial world, two words that you will hear,quite frequently, are “listed company”(orit’s plural of listed companies). A typical line inbusiness news is “Company X, which is listed in the …… Stock Exchange….” So what exactly isa listed company? It is a company that is included in the official list of an accepted stockexchange. In other words, the securities of the company, such as its shares or debentures,are publicly traded in a stock exchange. An internet search of “Stock Exchange” will providemore information.So the next big question… why do companies list? Why is it necessary for them to beincluded in an exchange? While a vast amount of literature is available out there on thistopic, I’ll just discuss the following fivepoints: 1. Find Capital A company will need capital for its day to day running, for expansion and for restructuring. A company can find this capital by issuing shares or debentures to the public. When a company lists on a stock exchange for the purpose of finding capital, it will have access to a much larger investor base, both retail and institutional. In comparison, a private placement of shares or debentures, will only give access to a limited number of investors. Investors, both old and new, who are looking for investment avenues, can buy the shares or debentures that are issued, after evaluating the growth prospects of the company carefully. The shares or debentures that are listed in an exchange are publicly traded; the importance of this is explained in the next point. 2. Price Discovery The shares or debentures that are listed will be publicly traded, which means that there will be investors who are buying (those who think it is a good investment) and selling (those who think it is overvalued). All the buying and selling prices are public information. This means that these are available for public scrutiny via stock exchange websites and publications, business media and research reports. This is an advantage for both the investors and the listed companies as their securities will have an acceptable “public” price which can be used in the valuation. Investors can value the shares or debentures that they hold which will help them to know the market value of their investment while the listed company will know its worth. If a “public” price did not exist, valuations can still be done but these will be quite subjective as information will be from sources that are not available to everyone. Page 1 of 2
  2. 2. 3. Transparency When a company lists its securities in an exchange, it will have to abide by the exchanges’ continuous listing requirements. Continuous listing requirements give the requirements that a company will have to follow, in order to be included in the official list of the exchange. These differ from country to country but generally include rules for the filing of financial statements, disclosing of vital information such as changes in the Board of Directors and changes in its business activities. All this information is publicly available via the exchanges’ or other websites and publications including the media. This will improve the transparency of a company as the public will know its inner workings. This transparency factor could help when the company is looking for new investors or partnerships. It could also improve the public image of the company and add value to its CSR (Corporate Social Responsibility) activities.4. Regulatory Requirement The regulator for a particular industry can mandate all the companies under its purview to list in an exchange for reasons such as transparency or under special circumstances such as when the company exceeds a specific number of investors. This is done as investors’ money is invested in the company and as such, the company is accountable to the investors (when transparency is needed to assure investor confidence).5. Other Reasons There are other reasons for a company to list such as an exit mechanism for the founders and as a way to separate ownership and management. The founders of a company can list the company in an exchange; sell their shares to other investors and retire with the money or simply invest it elsewhere. A listed company can have a professional management team, particularly as its public image can make recruitment easier, which will enable its founders or owners to concentrate on other interests or investments and leave the daily running of the company in the hands of professionals. Hope this helps. Page 2 of 2