What it means
Every listed security carries a ticker code and a record at the exchange. Before the exchange admits it, the issuer must usually publish a prospectus (a detailed disclosure document) and meet rules on transparency and governance.
After admission, it must keep publishing financial information and announcing important events. The main benefit is liquidity, meaning the ease of turning an investment into cash without moving the price much.
Because many buyers and sellers meet in one place, the gap between the price to buy and the price to sell, called the spread, tends to be narrow. For investors, this makes listed securities a convenient base for portfolios.
Listed securities also give regulators and investors a degree of protection. Trades go through a central clearing system, which reduces the chance that one side fails to deliver, and exchanges monitor unusual trading.
This does not remove investment risk, since prices can still fall sharply. Many institutional investors, such as pension funds and insurers, are restricted by their rules to hold mainly listed securities.
This is one reason issuers pay to list bonds as well as shares. Companies reporting under accounting standards also value listed investments using observable market prices, which are generally more reliable than model-based estimates.
Listed securities are also quoted in different ways. Shares trade in the currency of the exchange, bonds are often quoted as a percentage of face value, and fund units trade at a price close to the value of the holdings behind them.
Knowing the quoting convention avoids costly misreads when placing an order. The opposite is an unlisted security, such as shares in a private company, a private loan or an over-the-counter (OTC, meaning traded directly between parties) derivative.
Unlisted holdings can offer higher returns for the extra risk, but they are harder to price and much harder to sell.
In practice
Real-world examples.
Example
A pension fund holds $500,000,000 of government and corporate bonds, nearly all listed. When members retire and the fund needs $20,000,000 in cash, it sells bonds on the exchange within days at visible prices. It does not need to negotiate with a single buyer or accept a heavy discount for speed.
Example
A start-up founder holds shares in her private company, which are unlisted, and finds she cannot sell a small slice to pay a tax bill. Her friend, an executive at a listed company, sells a few shares through his broker in minutes. The difference in access to cash is the practical meaning of a listing.
Example
An insurance company wants to buy an exchange-traded fund tracking a broad share index. It chooses a listed fund because daily prices are published and the fund can be sold the same day if the insurer needs cash. Its investment team also values the fund daily at the published price.
Case study
Seen in the real world.
Calderwood Mutual is an illustrative, fictional insurer with $300,000,000 to invest. Its investment committee debated putting 20% of the money, which is $60,000,000, into a private loan fund that promised a higher yield than listed corporate bonds.
The finance director pointed out that insurers must be able to pay claims at short notice, and that private loans cannot be sold quickly. The committee agreed to cap unlisted holdings at 10% and to keep the rest in listed securities that could be turned into cash within days.
When a storm produced a surge of claims later that year, the insurer sold listed bonds to raise cash without difficulty. The unlisted loans stayed on the books, and the committee noted that they would have been a problem if they had been a larger share of the portfolio. The finance director added the liquidity test to the annual investment policy review.
Watch out
Common mistakes.
- Assuming a listed security cannot lose value, when listing only provides a marketplace and not a guarantee.
- Believing all listed securities are equally easy to sell, when thinly traded shares can have wide spreads and slow execution.
- Ignoring the difference between the exchange where a security is listed and the currency it is priced in, which can create exchange rate risk for a foreign investor.
Questions
People also ask.
What is the difference between listed and unlisted securities?
Listed securities trade on a recognised exchange with public prices, while unlisted ones trade privately, if at all.
Who decides whether a security can be listed?
The exchange, working under the supervision of a financial regulator, reviews the issuer's documents and decides whether it meets the listing rules. The regulator may also have to approve the prospectus before any sales begin.
Can a listed security be removed from the exchange?
Yes, through delisting, which can be voluntary or can happen if the issuer breaks the rules or its shares fall below minimum standards.
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