Learning Finance 004 Why are shares listed
Listing of shares along with limited liability concept have together been instrumental in creation of large companies that we see all around us today.. Listing of shares provides investors an exit route from the investment they make at the time of a company IPO.. without exit route, no investment is attractive, whatever may be the return !!
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Welcome friends to this video 4 in the series learning finance can be fun.
In this video we are going to deal with this concept of listing of shares and why are those
shares listed.
What is listing of shares?
Listing of shares really means that making those shares available for trading on a stock
market.
Now once the shares are listed people can easily buy or sell those shares.
Now in this context it's important to understand the distinction between primary market and
secondary market.
So what is primary market?
Primary market is the one where the company issues shares and gets money.
We have all heard about the concept of IPO, Initial Public Offering.
That is the time a company is being created.
company creates new shares, issues them to the public and public pays money to the company.
So in a primary market, the exchange of shares and money happens between the company and
the investors.
On the other hand, secondary market is the one where company is not involved, the current
investors are selling their shares and people who are not currently their investors are
buying those shares.
Of course, in some cases, the current investors can add on by buying some more shares.
So in secondary market, the transaction is happening between, you know, investors and
would-be investors.
Company has nothing to do with it directly.
Of course, when it comes to paying dividend or issuing bonus shares or any such corporate
action. The corporate secretary will note who now
are the shareholders and will accordingly dispatch the information or money to their account.
What are the advantages of listing? In any investment the ability to exit, the ability
to get out of the investment is very important. Return is definitely important but even more
important is the ability to come out of that investment and once the shares are listed
it becomes very easy to exit from an investment. One can directly sell those shares through
a stock market. One doesn't even get to know who is buying those shares but one gets
the money through the exchange mechanism and the shares are delivered through the exchange
clearing mechanism and we get the money. So the biggest advantage of listing is that it
facilitates exit for the current investors.
Also there is sharing of risk through public participation.
If there was no listing, if there was no trading in the stock market people would hesitate to invest in shares
for the very reason that we discussed earlier exit.
And because this exit is possible people are willing to chip in their own money.
Now this means that the risk is widely shared
across a number of investors
and there is no geographic boundary today.
It can be in any part of the country and to a certain extent the foreign investors can
also invest.
So this becomes possible, sharing of risk through public participation.
It also helps in discovery of value because unless the shares of the company are listed,
how do we get to know the value?
One can of course make estimates of that value but market provides the best estimate and
And therefore this discovery of value is possible through listing.
Further, because of listing, there are certain additional compliance requirements which become
applicable that improves the governance of the company, it brings certain amount of discipline,
