A listing on a stock exchange allows a company to have its shares bought and sold by investors in an organized market. Such a listing greatly increases share liquidity, and so is highly valued by publicly-held companies.
If a company wants to be traded on a stock exchange, it must first qualify under the standards set by the exchange. Generally speaking, the qualification standards are easiest for the American Stock Exchange and the most difficult for the New York Stock Exchange. These standards focus on a variety of factors, such as net income, cash flow, market capitalization, shareholders’ equity, and total assets. All of the stock exchanges offer multiple alternative sets of criteria under which a company can qualify for listing. For example, a company with strong cash flow but little net income can qualify under one set of criteria, while another business with less income or cash flow can still qualify if it has a large market capitalization. The different sets of criteria are designed to allow the securities of a variety of types of businesses to be listed.
If a company’s owners decide to list its securities on a stock exchange, they must apply to the exchange. The steps for doing so vary somewhat by exchange, but generally follow these steps:
- Alter bylaws. The company alters its bylaws to comply with the governance requirements of the stock exchange. This usually requires that the board establish audit, nominating, and compensation committees.
- File application. The company completes the exchange’s listing application and submits it, along with a filing fee.
- Investigation. The stock exchange assigns an analyst to the company, who investigates the application and asks additional questions on a variety of topics. This may result in a comment letter that points out changes the company must make before its application will be approved.
- Reserve ticker symbol. The stock exchange reserves a ticker symbol for the company, in anticipation of the successful completion of the application process.
- Set trading date. If the listing application is approved, the parties agree on a date when trading in the company’s stock on the exchange will begin.
- Begin trading. Depending on the exchange, the CEO of the company may be asked to appear at the stock exchange at the beginning of the first day of trading in the company’s stock.