A company can list its shares on two or more exchanges by dual listing. Few companies choose to have secondary listings due to it being cost-prohibitive. Depository receipts are growing in popularity and are another way companies can have their shares traded on multiple exchanges.
Now you’re probably wondering why a stock would be listed on two exchanges. What are the advantages and disadvantages? How does it affect the stock price? How does a company go about listing on multiple exchanges? This is where things get a bit more exciting, and it’s what I’m going to get into today. But before we get into all that, let’s start by talking about what it means for a stock to be listed on multiple exchanges.
A stock can be listed on multiple exchanges through dual listing, also known as cross-listing. There’s an additional second way, but we’ll get to that one later in this post. A dual-listed company will have a primary listing, which is the main stock exchange where a company is traded, as well as a secondary listing.
Any company looking to be traded on a specific exchange must meet the requirements of that exchange and pay a fee. With dual listing, the company must meet the listing requirements and pay the fees of both the company’s primary and secondary listing. Meeting these requirements is not a one-time event. Though there are initial filings required, there are also various ongoing filings, shareholder number requirements, and minimum capitalization levels that must be met.
When companies list on foreign exchanges, they often, but not always, choose exchanges that share the same language or a similar culture. For example, many of the largest companies in Canada are listed on exchanges in the United States.
Dual Listing Price Differences If you’ve seen stocks on different exchanges, you may have noticed that the prices are not always the same. If the stock is for the same company, why do stocks have different prices on different exchanges?
In theory, a stock should be at the same price on different exchanges. When there is a price difference, it’s usually quickly rectified by investors exploiting the price difference. Price differences are most likely to occur when trading hours are different, such as exchanges in different time zones.
There are quite a few reasons why companies may be interested in having their stock listed on multiple exchanges.
One potential advantage of dual listing is access to more capital. This is especially true for foreign companies looking to be listed on a U.S. exchange. The U.S. is the world’s largest economy and therefore has the most capital. Many companies outside of the U.S. find value in being listed on U.S. exchanges in order to increase their access to the massive amount of U.S. capital.
Another potential benefit is increased liquidity since investors have more options for where they can buy or sell shares. This also affects the bid-ask spread (the difference between the bid price and the asking price) since the more liquid a stock is, the smaller the bid-ask spread. This makes it easier for investors to buy and sell shares whenever they choose.
Dual listing also comes with access to more investors and an increased public profile. Assuming the exchanges are in different time zones, shares can be traded for more hours of the day. In theory, access to more investors should lead to an increased public profile, but this is only usually the case for foreign companies listing on a U.S. exchange. Since the U.S. has some of the most prestigious and well-known exchanges, companies outside of the U.S. can increase their public profile by being listed on a U.S. exchange.
U.S. companies listing on foreign exchanges usually see little to no increase in their public profile.
Companies with significant operations in multiple countries may also find it advantageous to be listed on more than one exchange. For example, BP trades on the London Stock Exchange, the New York Stock Exchange, and the Frankfurt Stock Exchange.
With all the advantages of dual listing, it may seem strange that it’s relatively rare. Dual listing was quite popular in the 1980s and 1990s, but in today’s market, it has less value, and recent research is casting doubt on whether the supposed advantages of dual listing make much of a difference.
The most significant disadvantage of dual listing is the cost. When a company is listed on multiple exchanges, both initial and ongoing costs can be prohibitively expensive.
Dual listing can also be complicated.
Different exchanges have different regulations and requirements. For example, different exchanges may have different accounting standards. These differences in rules and regulations often mean companies have to hire additional legal and finance staff. Dual listing also usually requires more from the senior management of the company. For example, senior management must put in the time and effort needed to communicate with a whole different set of investors effectively.
We’ve seen that dual listing is often most beneficial for foreign companies looking to be listed on U.S. exchanges, but that’s also the companies for whom dual listing is most complicated. Listing on a U.S. exchange has never been especially easy, but it became far more complicated after 2002 when the Sarbanes-Oxley (SOX) Act was passed.
The SOX act is meant to protect investors from companies that create fraudulent financial reports. The additional reporting requirements put in place by the SOX act make it more difficult and more expensive for companies to be listed on U.S. exchanges. Many foreign exchanges do not have these strict requirements, which means this is an added expense for many foreign companies.
Some companies, such as Charles Schwab (SCHW) have tried dual listing, only to decide later that the cost and additional requirements far outweighed any potential benefits and returned to being listed on a single exchange.
Dual listing can be expensive and complicated, but there’s another way companies may be listed on multiple exchanges, and it’s growing in popularity.
Earlier in this post, I mentioned that there’s a second way for companies to have stock listed on multiple exchanges – this is possible through depository receipts. Depository Receipts (DRs) are a fascinating investment vehicle that offers many of the advantages of dual listing with fewer disadvantages.
A DR is a security traded on a local stock exchange for a foreign company. The purchase of a DR represents the stock of the foreign company, and gives you the benefits of owning that stock, but is not outright ownership of the stock.
How does that work? A DR represents the stock of a foreign company that has been deposited at a domestic bank. That bank then issues the DR. This allows you to invest in foreign companies without truly investing internationally.
The most common type of DR is an American Depository Receipt (ADR), which has been in use since the 1920s. When you purchase an ADR, the underlying asset is held by an American financial institution. ADRs are traded in U.S. dollars. Some of the most popular ADRs include companies from all over the world, including Israel-based Teva Pharmaceutical (TEVJF), China-based Alibaba (BABA), and Brazil-based Vale SA (VALE).
After ADRs, Global depository receipts (GDRs) are the most common type of DRs, though there are other types as well.
DRs give investors the ability to diversify their portfolios more conveniently and cost-effectively, but they also come with some drawbacks. One of the most significant issues is that some DRs are only available to institutional investors. DRs also typically have lower liquidity and come with a higher level of risk, since a company does not back them. DRs can also have high fees.
In certain circumstances, dual listing makes sense, but ultimately, there’s a reason few companies choose to do it. Dual listing has many drawbacks, and in our globally connected world, the advantages aren’t as significant as they used to be. Dual listing has mostly fallen out of favor, but DRs are having a moment. Only time will tell if their popularity continues to grow.