Listing offers advantages to both the investors as well as the companies. The following are the advantages of listing to investors:
1. It provides liquidity to investments. Security holders can convert their securities into cash by selling them as and when they require.
2. Shares are traded in an open auction market where buyers and sellers meet. It enables an investor to get the best possible price for his securities.
3. Ease of entering into either buy or sell transactions.
4. Transactions are conducted in an open and transparent manner subject to a well defined code of conduct. Therefore investors are assured of fair dealings.
5. Listing safeguards investors interests. It is because listed companies have to provide clear and timely information to the stock exchanges regarding dividends, bonus shares, new issues of capital, plans for mergers, acquisitions, expansion or diversification of business. This enables investors to take informed decisions.
6. Listed securities enable investors to apply for loans by providing them as collateral security.
7. Investors are able to know the price changes through the price quotations provided by the stock exchanges in case of listed securities.
8. Listing of shares in stock exchanges provides investors facilities for transfer, registration of rights, fair and equitable allotment.
9. Share holders are provided due notice with regard to book closure dates, and they can take investment decisions accordingly.
Advantages of listing to companies
1. Listed securities are preferred by the investors as they have better liquidity.
2. Listing provides wide publicity to the companies since their name is mentioned in stock market reports, analysis in newspapers, magazines, TV news channels. This increases the market for the securities. As Hasting has observed,
“A listed security will receive more attention from investment advisory services than an unlisted one.”
3. Listing provides a company better visibility and improves its image and reputation.
4. It makes future financing easier and cheaper in case of expansion or diversification of the business.
5. Growth and stability in the market through broadening and diversification of its shareholding.
6. Listing attracts interest of institutional investors of the country as well as foreign institutional investors.
7. Listing enables a company to know its market value and this information is useful in case of mergers and acquisitions, to arrive at the purchase consideration, exchange ratios etc.
8. By complying with the listing requirements, the operations of the company become more transparent and investor friendly. It further enhances the reputation of the company.
Disadvantages of listing Securities
Listing is not without its limitations. The following are the limitations of listing:
1. Listing might enable speculators to drive up or drive down prices at their will. The violent fluctuations in share prices affect genuine investors.
2. In case of excessive speculation, share prices might not reflect its fundamentals. The stock markets may fail to be the true economic barometer of an economy’s performance.
3. In case of bear markets share prices might be hammered down, and the standing of a company might be lowered in the eyes of the investors, shareholders, bankers, creditors, employees etc.
4. Listing of securities may induce the management and the top level employees to indulge in ‘insider trading‘ by getting access to important information. Such actions adversely affect the common security holders.
5. The management might enter into an agreement with brokers to artificially increase prices before a fresh issue and benefit from that. Common public might be induced to buy shares in such companies, ultimately the prices would crash and the common investors would be left with worthless stock of securities.
6. Listing requires disclosing important sensitive information to stock exchanges such as plans for expansion, diversification, selling of certain businesses, acquisition of certain brands or companies etc. Such information might be used by the competitors to gain advantage.
7. Outsiders might acquire substantial shares in the company and threaten to take over the company or they might demand hefty compensation to sell their shares.
8. Stock exchanges in India still suffer from shortcomings. Listed securities might be utilized by scamsters to indulge in scams.