Decoded: Why Companies List Shares On The Stock Market

The stock market is amassed with lots of companies listing their shares for investors and traders to purchase and sell. And in recent times, there's been a beeline of companies listing their shares through IPOs, i.e. initial public offerings.

Amidst this IPO frenzy and even the history of the stock market, some IPOs and share performances turn out well and the shares meet or even outperform the investor¡¯s expectations, whereas others slump and bleed red both in the long and short run, hence resulting in investors sitting on a pile of losses.

But besides all this, have you ever wondered the reason behind companies listing their shares on the stock market? Curious to know?

Read on as we deep dive and decode why companies list their shares in the stock market.

The Concept Of Listing Securities

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Listing of securities or shares on the stock market or stock exchange is a process where the shares of a company become available to the public for buying and selling.

Here, investors need to remember that the number of shares available are limited, hence not every investor who applies during the IPO gets the 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.

Note that a company desirous of tapping the equity market to list through IPO, needs to first meet the respective eligibility criterion and other norms put forth by SEBI and the two major national stock exchanges NSE and BSE. The company has to appoint merchant bankers, in consultation with whom a draft prospectus (DRHP) is prepared.

To know more DRHP, its importance, and how to cut through the clutter when investing in IPO, click here.

Advantages of listing on stock exchange

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Of course. When tons of companies strive to get their shares listed on the stock exchange, it certainly must have a fair share of benefits, right?

Here are some of the benefits as well as reasons for companies to list their shares on the stock exchange:

1. Raise funds

More often than not, the primary goal of listing through IPO, is to raise funds. The company can raise funds for growth and expansion or to pay off existing debts. Whatever the purpose is, companies tend to aim at tapping investors¡¯ money through IPO to fulfil the objective behind the IPO, which is required to be clearly mentioned in the prospectus.

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2. Acts as an exit route for existing investors

Given that the shares of many private companies are often held by several stakeholders, including the company's promoters and private investors, an IPO is often a way out for such investors to liquidate their stake either partially or completely. Through listing, the existing investors of the company can offer their shares to the public through an Offer for Sale (OFS) and sell off their shares to the public. Thus, this way helps the existing shareholders to offload their held shares and opt for an exit route.

3. Boosts trust of stakeholders

When the company gets listed, it has to comply with the applicable rules and regulations of the market regulator SEBI. This is what keeps tight control over the company's financial and non-financial disclosures, trading activities as well as corporate practices. This leaves little room for malpractice or fraud, although it is rarely impossible. Overall, the listing of shares acts as a booster to the confidence of the company's stakeholders in both its operations as well as management.

Also Read: Common Stock Market Myths To Know Before Investing

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4. Opens the possibility of takeovers

As listing on the stock exchange gives companies the much needed additional funds, they can choose to take over relatively smaller companies in the same business or even look to other domains for diversification and growth.

5. Employee motivation through ESOPS

When a company gets listed on the exchange, it can use its shares to attract talents via ESOPs (Employee Stock Ownership Plans). This helps the company in reducing the monetary compensation and retention cost for an employee, besides increasing the chances of recruiting suitable talent for the respective roles. ESOPs often turn out to be an additional boost to the overall package, especially because not all companies can give this additional benefit.

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6. Enhanced visibility & brand awareness

Another benefit of listing is that it creates brand awareness for the company, which might have been little known before its IPO.

So, through listing, such companies can get the attention of investors as well as analysts who tend to deep dive to study the listed company¡¯s fundamentals and technical aspects. Overall. this can also play a crucial role in enhancing the company¡¯s goodwill and reputation in the market, besides creating much-needed brand awareness.

However, one thing is crucial to remember here. This public exposure through IPO can be a double-edged sword for the company, which will give you appreciation when you are doing well but will also put you on the receiving end of criticism whenever something goes wrong or the company doesn't perform as per investors¡¯ expectations. All this impacts your share price as well.

Also Read: Why Stock Market Downfalls Are Actually A Buying Opportunity

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