What it means
Getting listed usually happens through an initial public offering (IPO), where a company sells new shares to the public for the first time. The company works with banks and lawyers, publishes a prospectus (the formal document describing the business, its risks and its finances) and applies to the exchange and its regulator.
Listing matters because it opens up a large pool of capital and gives the business a daily market price. Early investors and founders gain a route to sell some of their holdings, and the company's shares become a useful currency for acquisitions and employee share plans.
The price of admission is a permanent duty to be transparent. Listed companies must publish audited accounts, report results on a regular timetable and announce price-sensitive news promptly.
They also pay listing and advisory fees, usually keep independent directors on the board and face constant scrutiny of every set of numbers. Listing is not only for shares.
Bonds, funds, warrants (instruments giving the right to buy shares at a set price) and futures can also be listed, which is why the phrase listed security exists. Exchanges often run tiers, such as a main market for large firms and a junior market for smaller ones, each with different entry standards.
For analysts, a listed company is easier to value because its share price, trading volume and ratios are visible to everyone. Valuing an unlisted business often involves a discount for lack of marketability, since its owners cannot simply sell on an exchange.
A listing can also end, either by choice in a buyout or by force if the firm breaks the exchange's rules.
In practice
Real-world examples.
Example
A fast-growing software company lists on a major exchange to raise $150,000,000 for product development and international expansion. Its early venture investors can now sell part of their stake in the open market. Staff with share options can finally turn them into cash.
Example
A regional manufacturer wants to issue a bond that insurance companies and pension funds are allowed to buy. Those investors prefer listed bonds because prices are visible and the bonds can be sold quickly. The manufacturer applies to list the bond so the issue sells at a lower interest rate.
Example
A family-owned retailer is approached by a private equity firm offering to buy all its shares and take the company private. The board weighs the premium on offer against the freedom of no longer publishing quarterly results. Shareholders vote, the deal completes and the company is delisted.
Formula
Calculation
Market capitalisation = Share price x Number of shares in issue
Suppose a company has 40,000,000 shares in issue after listing, including 8,000,000 new shares sold in the offering, and the shares are priced at $25. Its market capitalisation is 40,000,000 x $25 = $1,000,000,000. The gross proceeds of the offering are 8,000,000 x $25 = $200,000,000. If underwriting and advisory fees total 6% of those proceeds, the fees are $200,000,000 x 0.06 = $12,000,000, so the company receives $200,000,000 - $12,000,000 = $188,000,000.Case study
Seen in the real world.
Harbourline Freight Group is an illustrative, entirely fictional shipping and logistics business that had grown for twenty years on bank loans and reinvested profits. By its twentieth year it wanted to buy three competing depots, a deal needing more cash than its lenders would provide.
The board chose to list. Over nine months the company appointed independent directors, tidied its accounting policies, had three years of accounts audited to a higher standard and wrote a prospectus. Management found the preparation uncomfortable, because every weak internal report was exposed.
After the listing, Harbourline raised enough to buy the depots and used its shares to pay part of the price. The chief executive later said the quarterly reporting rhythm was the hardest adjustment, but the visible share price also made it easy to see what investors thought of each decision.
Watch out
Common mistakes.
- Assuming a listed company is automatically safe, when a listing only proves that the firm met the exchange's entry rules, not that it will make money.
- Treating the share price as the whole value of the business, ignoring that the price can swing for reasons unrelated to performance.
- Confusing a listed company with a large one, when many small and loss-making businesses are listed on junior markets.
Questions
People also ask.
What is the difference between listed and unlisted?
A listed company's shares trade on an exchange with a public price, while an unlisted company's shares change hands privately, if at all.
Can a company choose to leave the exchange?
Yes, a company can delist voluntarily, usually after shareholders approve a takeover or buyout, but the exchange's rules set out how and when.
Does listing mean the company receives money every time its shares trade?
No, the company only receives cash when it issues new shares; later trades are between investors and the price paid goes to the seller.
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