Definition and Example of Dual Listing
Dual listing occurs when a company’s shares are listed on two or more stock exchanges. Typically, a company is listed on an exchange in its home country as well as on a prominent exchange in the United States, such as the New York Stock Exchange or NASDAQ.
How Does Dual Listing Work?
Companies often engage in dual listing to gain access to capital outside of their home country’s exchange. They may also pursue dual listing to comply with stricter listing standards.
Since the New York Stock Exchange and NASDAQ are the two largest exchanges by market capitalization, most companies listed on them are foreign companies looking to gain exposure to the U.S. equity markets.
The most common way for a foreign company to dual list on a U.S. exchange is by issuing American Depository Receipts (ADRs). ADRs are issued by a U.S. bank or broker. Investors who purchase shares of the company through ADRs do not actually own shares of the company but rather own shares held by the banks or brokers that issue them.
Similarly, companies may offer investors shares in markets in countries outside of the United States through Global Depository Receipts (GDRs), which are issued by a depository bank in an international market, primarily in Europe.
A foreign company wishing to list on a U.S. exchange must pay application and issuance fees that exceed $50,000.
Advantages and Disadvantages of Dual Listing
Advantages:
– Increased access to capital: Simply put, exposure to more investors increases the likelihood of raising additional capital.
– Increased liquidity: When more people can buy shares of the company, it increases liquidity, which usually reduces the bid-ask spread.
– Increased consumer awareness: Heightened awareness of the company among investors can lead to increased consumer awareness.
– More trading time available across multiple markets: If a company is listed on two or more exchanges in significantly different time zones, it increases the number of hours shares can be traded each day.
Disadvantages:
– Costly listing fees and associated costs: Listing a share on either of the U.S. stock exchanges costs more than $50,000, which is a small amount if the company is preparing to raise millions of additional dollars. However, there may also be significant costs for additional accounting and reporting needs.
– Extra time required to meet listing requirements and accounting regulations: Stock exchange regulations differ in various countries, requiring paid professionals to handle them and ensure the company is compliant. The same can be said for meeting requirements for separate accounting and reporting.
– More requirements for communication with investors: Preparing for a listing on a new exchange requires company officials to spend a lot of time pitching to investment banks and individual investors. Here as well, the additional costs can be minimal compared to the extra capital raised.
What Does This Mean for Investors?
In general, dual listing is seen as positive for investors, as it provides easier access to companies outside of their local market that they may not be able to invest in through other means. In most cases, investors can purchase shares of dual-listed companies through the same brokerage accounts they use to buy local stocks and bonds.
Dual-listed companies may seek to list on less regulated exchanges, such as over-the-counter (OTC) markets. Investors should remember the “caveat emptor” guideline that applies to all OTC traded stocks.
Key Takeaways
Companies primarily choose dual listing to increase access to capital and facilitate the process of purchasing their shares by investors outside their home country. The most common way for companies to pursue dual listing in the U.S. is by issuing American Depositary Receipts (ADRs). The costs of dual listing can be significant, but many companies consider them worth paying for given the additional amount of capital that can be raised.
Source:
https://www.thebalancemoney.com/what-is-dual-listing-5219877
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