Basics of stock market 3: Why does a company want to get listed in the stock market
Let me get this straight. A stock market is a place where people go to buy and sell shares. What are shares? We’ll talk about it at a later time. Buying the shares will increase a company’s valuation. So, if people want to buy shares, there should be a common platform where people can buy shares, this platform is our exchanges.
We have two exchanges in India, which are National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). We’ll discover what NSE, and BSE are at a later stage. By logic, companies go to NSE or BSE and get listed there, so that people can also go to NSE/BSE to buy shares. Just to get things straight, ideally, people cannot go to NSE and buy shares, that is where our brokers come into the picture. Brokers are the mediators between exchanges and the people who want to buy shares. Brokers are the link between these exchanges and us common people.
Joining the stock market will allow the company to benefit from improved access to capital, increased global profile, and greater access to liquidity. Now, let’s see why companies want to get listed in these exchanges, consequently, get listed in the stock market.
Table of contents
Access to Capital for growth
Most companies reach a level wherein you need to pump additional funds to keep up with the growth. Getting additional capital for future growth, expansion plans, lay of debts is vital for a company's survival. Without the added support, there is a limit to which the company can grow.
Enhanced visibility
Going public increases visibility and improves public perception of the company, thereby increasing employee value and trust. Going public attracts a lot of people and institutions. This increases the shareholder base and enhances credibility making more and more people participate in buying the company's shares.
Liquidity
Liquidity means getting more shareholders into the company. A lot of people becoming involved in the company’s business makes the business more liquid. This allows people to share the same risk the company is going through as well as benefiting from the growth of the company.
Transparency
The company is more transparent in conducting various operational activities. They would have to do an annual audit as well as quarterly auditing. The board and management are responsible for the accountability of the company, no matter whichever positions they are in.
Compliance
There are a lot of rules and guidelines the company must follow in order to get listed in the exchange. They would also need to quarterly or yearly keep up with this compliance set down by SEBI which are disclosed through the exchanges.
Pay for acquisitions
Now, since the company has a lot of shares in their hand, it can exchange these shares in place of its cash and assets. By this, the company grows using its existing cash and assets which would have otherwise gone to the creditors. This also reduces the company’s debt to a much larger extent.
Structure the company’s business
Since a lot of people have given their trust to this company by buying their shares, the responsibility of the company’s board of directors to review its strategy, growth, vision, success is a very crucial factor. Since the company is now in the competitive space, they would have to review, send reports every quarterly adding to other documentation as well. This maintains the structural integrity of the company to an extent.
Open your company’s share potential
Along with people like you and me who buy shares, large institutions also buy shares of a company. But they do a thorough investigation and many quality checks before they make up their mind to buy the shares. But, once these big institutions start buying, automatically other institutions join up to buy more shares, increasing their valuation and credibility.
Business acceleration
Till now, your company’s visions mission, and thinking were closed to few people. Now, since your vision is shared with millions of people, the acceleration you get through listing is immense both domestically and globally.
Market exposure
Being part of the market and most importantly, being part of an index is the next step towards a stable company. This increases the trading volume making it possible for your company to get listed into other financial instruments like derivatives, futures & options. This is a key benchmark as portfolio managers and fund managers eye on stocks enabled for derivatives. Also, most of the portfolio managers are influenced by the number of financial analysts who cover your stock, this enhances its reputation and liquidity.
Boosting employee retention
Most companies give ESPP plans for their employees. This is called Employee Share Purchase Plan. When employees of a company buy the company’s share, they get the share at a discounted value. Mostly they get at a discount of 15-20% of the current market price. This results in higher retention rates among employees and increases employee trust in the company.
Bringing new projects and increasing the company’s valuation thereby increasing the share price becomes a motivation for all its employees. This also makes hiring staff easier as the company is now on the road for a reputed company. They also use shares to reward valuable employees as a gift in return.
Foreign Investors
There are two types of big investors who invest heavily in stocks. They are Domestic Institutional Investors (DII) and Foreign Institutional Investors (FII). Since you are now listed, foreign institutions have an eye on your business. The currency conversion is also high for them, so the invested value will be in several thousands of dollars. This is a huge amount if you get the click.
Conclusion
Even though companies are going public, this might not always be the safer choice. But getting listed makes the company more visible to valuable investors domestically and around the world. When a company gets funds, it has the path and vision to grow its business. Now you might be curious about how the company gets listed in the stock market, right?
What is the process to be done from the company side to get listed there? What are the complexes and compliances the business must keep in order to get listed in the exchange? What is the role of Bank and merchant bankers through this process? Which exchange should a company choose to get listed? Let explore the answers to all these questions in the next blog.
Stay tuned!