Listed Security

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What is Listed Security?

The listed security includes financial instruments (stocks, bonds, derivatives, etc.) that trade in an exchange. The securities which do not deal in exchange trade via the Over-The-Counter market,” also known as OTC securities. OTC is a dealer market.

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  • The listed security involves financial instruments such as stocks, bonds, derivatives, etc. that one may trade in an exchange. The securities which do not deal in exchange trade through the Over-The-Counter market," also known as OTC securities. OTC is a dealer market.
  • The types of securities traded in an exchange and listing procedure are stocks, bonds, and derivatives. 
  • Listed securities are the financial market backbone. The exchange is essential in giving liquidity to earlier illiquid securities and acts as a link between the buyer and seller of financial products.

Types of Listed Securities

Different types of securities that trade in an exchange and listing procedure: -

#1 - Stocks

When a private company has been operating for a few years and wants to raise more capital from the market, they sell their own and make them public via listing their shares in exchange. Each exchange has specific rules like minimum stockholder’s equity, minimum share price, a minimum number of shareholders, and the minimum number of good years as a privately held company.

Example #1

ABC Co. is a private company planning to raise more capital from the market by listing its shares on the stock exchange. What are the advantages and steps?

Advantage

There are a few ways to raise capital. For example, if ABC Co. plans to take a loan from the bank, it will need to pay interest even if it does not earn a profit. So taking a loan is a fixed liability for ABC Co. So, instead of taking a loan from the bank, if ABC Co. can make its company public by selling a percentage of the owner’s ownership, it will help ABC Co. raise money and it will not have a fixed liability to pay interest every year. But, of course, when you make your company public, it depends on the company’s management, whether they want to pay dividends or not.

Steps to List Shares

  1. Decide an Underwriter

    Decide an underwriter who will help the private company to get it listed as a public company, as underwriters have licenses to assist in the listing process.

  2. Share Price

    Underwriters will decide the share price by judging the economic condition and calculating the future earnings of the company's power.

  3. Legal procedures

    One will meet several legal procedures, and the listing date will decide.

  4. When the shares are traded in exchange, the first day is called the “Initial Public Offering.” It is done in the primary market.

  5. From the next day, shares are already in the hands of investors, and they start trading shares among themselves in the secondary market.

Listed-Security
Example #2

XYZ Co. has $10 million authorized shares, 800,000 issued shares, and 50,000 treasury shares. How many shares are outstanding in the market?

Getting authorization to list shares in the market is costly; there are many legal works and fees that a company will need to pay. So, say a company wants to issue 1,000 shares in the market now, they will still get authorization of 1,000,000 shares. But, before issuing shares, they do not want to go through the tedious process of getting authorization first.

So here, XYZ Co. has authorization for 10 million shares, out of which it has issued 800,000. All issued shares are not traded; few shares are bought back and kept in the treasury for future corporate action needs. So here, 50,000 shares are held in the treasury. So, outstanding shares in the market are: -

Outstanding Shares = Issued Shares – Treasury Shares

Listed security (outstanding shares)
  • = 800,000 – 50,000
  • = 750,000

Therefore, 750,000 shares are trading in the market.

Example #3

The share price for EFG Co. is $50, and there are 1 million outstanding shares in the market. Calculate the market capitalization.

Solution:-

Market Capital = Share Price * Outstanding Shares

Listed security (Market Capital)
  • = $50 * 1,000,000
  • = $50,000,000.

So, listed securities help us calculate the company's value in the market.

#2 - Bonds

Bonds are also an important way to raise capital for companies. Several bonds have different maturities, coupon rates, options, and face value. When a company issues a bond, it is a liability for the company, and it will have to pay the coupon no matter whether the company earns a profit.

Getting a bond listed in exchange helps investors get the liquidity they want from any investment.

Example #1

ABC Co. plans to raise $50 million by issuing bonds with a face value of $1 million. With a coupon rate of 5%. Maturity 10 years. So for this, ABC Co. will have to issue 50 bonds in the market with a face value of $1 million each. Each year ABC Co. will have to pay interest of 5% * $1 million * 50 = $2.5 million.

So, any investor who bought the bond will have to wait ten years to get his money back. So, the secondary market helps investors get liquidity as they can exchange securities in the secondary market.

Example #2

A bond XYZ is giving a coupon rate of 5%, and the interest rate in the market rose to 8%. What will happen to the price of the bond in the secondary market?

As the bond is listed as a security, its price keeps on changing. So, if in the market similar bonds are paying a Coupon rate of 8% in the market and bond XYZ is paying a coupon of 5%, the demand for the bond in the secondary market will fall as no one will be willing to buy it, and its price will fall.

So, the secondary market helps determine the correct price of a listed security.

#3 - Derivatives

Derivatives are securities that derive their value from an underlying security. There are several types of derivatives, like Options, Swaps in finance, forwards, and futures. Options and futures are mostly exchange-traded.

Example

ABC Co. is trading at $5; what will happen to the call option if the price of ABC Co. increases to $10? The strike price of the call option is $8.

Solution: Call options are listed securities. They are right to buy. So, whosoever purchases the call option will have the right to buy ABC Co. stock at $8. So, ABC Co. is trading at $10, and whoever acquires the option will get the share at $8. So obviously, the price of the option will increase.

Trading is done as the options are listed, and their price changes with the underlying stock.

Advantages of Listed Securities

Some of the advantages of listed security are as follows: -

  • Listing of securities helps incorrect pricing of the securities.
  • The secondary market provides liquidity to security, which is beneficial for investors.
  • When a company gets listed and becomes public, there are many disclosures that the company does quarterly or events. So, it helps in mitigating fraud.
  • It helps to provide a transparent market for all investors.

Disadvantages of Listed Securities

Some of the disadvantages of listed security are as follows: -

  • Unnecessary panics can cause a huge fall in share prices.
  • Anyone with money power can play with the price of a listed security.
  • Making a company public takes control from the previous owner, which delays and can miss decision-making and good opportunities.

Conclusion

Listed securities are the backbone of the financial market. The exchange plays the most important part in giving liquidity to earlier illiquid securities and act as a bridge between the buyer and seller of financial products

Frequently Asked Questions (FAQs)

What is AIM listed security?

AIM is a specialized London Stock Exchange (LSE) division that caters to smaller, riskier companies. AIM's lax control and listing requirements contribute to the companies' smaller size and a higher level of speculative nature.

What is ETF-listed security?

An ETF, an exchange-traded fund, is a marketable security that analyzes an index, commodity, bond, or basket of assets like an index fund. In other words, ETFs are funds that determine indexes such as CNX Nifty or BSE Sensex.

What is a pink sheet listed security?

The pink sheet listed security refers to the listings for stocks that trade over Over-The-Counter (OTC). These pink sheet-listed securities are not listed on a significant U.S. stock exchange. These are mostly penny stocks that trade for less than $5 per share. They are considered risky due to the absence of regulatory oversight.

What is an Inward Listed Security?

Inward Listed Securities are referred to the listed security issued by a foreign corporation and held secondarily on the Johannesburg Stock Exchange (JSE).