Problems of Stock Exchange Listing

What is the Stock Exchange?

The stock exchange in India serves as a market where financial instruments like stocks, bonds and commodities are traded.

It is a platform where buyers and sellers come together to trade financial tools during specific hours of any business day while adhering to SEBI’s well-defined guidelines. However, only those companies who are listed in a stock exchange are allowed to trade in it.

Stocks which are not listed on a reputed stock exchange can still be traded in an ‘Over The Counter Market’. But such shares would not be held high in esteem in the stock exchange market.

A stock exchange market is a platform for trading provided by an exchange. The members get registered with the exchange under listing agreements, these members are investors, issuers of the securities, and intermediaries like brokers, sub-brokers, mutual funds, depositories etc. Even different classes of securities of the same issuers are separately listed in the market.

What is a Listed Company?

A listed company is the one whose shares are publicly traded on the stock exchange. Such companies need to confirm the listing requirements of that exchange strictly. This consists of a minimum earning level and the number of shares listed.

Companies that are listed on a stock exchange take out an SME IPO or Initial Public Offering by which they sell shares to the public and in return they raise a whopping amount which in turn helps them to grow business to a new level.

Here, the prices of the shares are based on the supply and demand of the share. The Bombay Stock Exchange or BSE India currently lists more than 600 companies.

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How to list a company in the stock market?

Companies can list themselves in the stock market by issuing an IPO. Companies have to comply with SEBI (the market regulator) norms before their IPO application. Once the IPO is approved or when application for IPO is accepted, interested investors, both retail and institutional, subscribe to the IPO and invest in the shares.

It is important to remember that the number of shares available for investors are limited. So not every investor who applies for the IPO gets share allotment. This allotment is through a random process to ensure there is no bias in choosing the beneficiaries. After the shares are allotted to the investors, they are listed on the stock exchange.

Problems of Stock Exchange Listing

• Accountability and scrutiny. Public companies are public property. As such they are expected to comply with the rules of the markets they populate. Companies on AIM have to use the services of a nominated advisor (known as a Nomad), a firm or company which has been approved by the London Stock Exchange, who effectively acts as the regulator of the business, managing its listing and ensuring its ongoing compliance.
• Undervaluation risk. Issuing shares is not only dilutive but shares can also lack liquidity. This can undermine fundraising and acquisition activity, because there is a lack of demand for the shares. In addition, a lack of demand normally translates into a low share price, so the use of shares as an acquisition currency may also lose its appeal. On the public markets, companies” share prices are not only affected by their own performance, but by the performance of the market and the economy as a whole.
• Cost. The amount of management time and the significant costs associated with a flotation and ongoing listing should never be underestimated. From the process of flotation itself, which can take many months, to the time-consuming administration of regular and constant announcements (interim and final financial results, director dealings in shares, trading updates etc.) there is a lot of activity to manage. It’s quite hands on, labour intensive and time consuming,” says Dr Basirov. So it’s not suitable for every business.

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Is It Worth It?

Sometimes when business leaders have decided to go private in the past, they have reversed this later. For example, Michael Dell took his computer company private in 2013 only to re-list it five years later. He had got the business into a stronger position that he felt would be recognised by the markets. Musk himself has mused about taking Tesla private, having felt that the car company was being undervalued by the markets in the past, though now it’s a different story after the share price has surged in the past couple of years.

Neither is an improvement in a company’s market sentiment the only argument for staying listed. The greater transparency can be a selling point to investors, and selling shares to them is not the only way to take advantage of this. Companies can always opt for loans or bonds as alternatives – and hence limit their exposure to social media influencers and amateur traders.

And instead of living in fear of negative sentiment, companies might see it as a challenge and reflect on how to better respond. This might involve intensifying their public relations, advertising and lobbying strategies to better explain the company to the outside world.

Company executives can still be hurt by big shifts in their share price because this is typically one of the performance indicators that determines what they get paid. But again, delisting isn’t the only way around this problem. Instead, companies can rethink their performance indicators – perhaps putting more emphasis on environmental performance, for example, in anticipation of the fact that regulations in this area are bound to increase.

One other potential medium-term advantage to being listed relates to regulation. The more companies that go private, the more likely that regulators will impose more rules on them to protect their investors and prevent fraud. They might even be tempted to increase taxes on private companies to make up for the lack of regulatory scrutiny. In this sense, the allure of going private might turn out to be fool’s gold.

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Tips To Minimize Losses Of The Investors

Some common but indispensable tips to new investors are:

What is your goal

Stock market investments like every other investment should be made keeping a goal in your mind in terms of the initial investment amount, the time of investment and the final amount to reach. Unless you have high expertise in the capital market you should not be looking to make money on short term investments, rather plan and invest according to your personal requirements.

Relentless research 

There is nothing like too much research, especially when you are new to the market. Read about the company you are investing in, read about the sector, the government policies in that sector, its management and it’s past financial statements and compare its position to its competitors as well. You can even read tips given by experts on stock investments but make sure it is a trusted individual and not a sponsored person.

Also Read: HDFC Bank Share: Exploring the Fundamentals and Investment Potential

Don’t put all your eggs in one basket

The advice can be understood in two manners, first is to not invest all your savings in the share market itself. There are millions of riches to rags stories of the market to make you realise the potential of loss in this market thus one should always invest only the surplus income after securing an emergency fund, general savings and other forms of investment. Gold is also a good option especially due to its inverse relation to the market.

And the second meaning is that the investors should never put all their money into one company or one sector, it is preferred that the investments are always balanced to minimise the risk. For example, investment in broad and largely unrelated industries like pharmaceutical, metals, petroleum, banking is considered safe as even if due to an event a sector crashes the others are relatively safer.

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Dive in when the market is down

The best time to invest in the stock markets is when the market in its entirety is not performing well, this enables the investors to invest lower amount and then when the market revives (even to its normal) the investor is at a profit because he can already sell and earn profits a the general price of the stock.

Management is the key

The importance of management of a company cannot be emphasized. Often the right leadership is able to turn the operations of a company for better or for worse according to their skills and expertise. Thus analysing the track record on management personals or at least having a brief look at it in case of a major change is recommended.

Know when to exit

We all want to earn profits thus the rooky mistake made by investors is often to not sell the stocks on a decent amount of profit in the hope of getting a better profit. If the stock is one that you do not wish to keep and is planning to sell in the near future you should do it a price which allows you to gain decent profits and not be led by your greed to unreasonably high profits because the situation can easily be reversed leading you to be in a much worse position.

Stay updated

Probably the worst mistake investors make is to invest and not keep track of their investments, a weekly analysis is recommended in the ordinary course of business.