Introduction
Investors have access to various exchanges in this tech-driven era of global trading. It is now simpler than ever to trade and invest in stocks, thanks to the emergence of different electronic trading platforms. Many investors do, however, wonder if shares can be purchased on one market and then sold on a different one. We'll love to break it to you that, yes; it is very much possible. Let’s look at the systems that let investors transact across different exchanges.
What is cross-listing?
Cross-listing is the process through which a corporation lists on multiple exchanges within the country or on an exchange in a different nation. If a company needs access to more capital than being offered through one exchange, it would desire to cross-list. Another scenario could be that this move is a part of its strategic expansion plans.
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Are there any specific requirements for cross-listing?
The company in consideration must satisfy the same criteria for cross-listing approval concerning accounting policies as any other listed exchange member. The primary requirement specific to this process includes the initial and ongoing filings with regulators. Other requirements that need to be met are a minimum number of shareholders and a minimum market capitalisation.
Why are stocks traded on multiple exchanges?
Despite having the option, very few corporations list their stocks on multiple exchanges. However, the ability to trade shares across exchanges gives investors more choices and flexibility. It helps in managing their portfolios as the worldwide financial markets keep evolving. Let’s consider the possible scenarios when stocks can be traded on multiple exchanges.
- Liquidity – With multiple exchanges, many shares are available to meet market demand. A cross-listing gives investors a variety of markets to select from when buying or selling the company's shares. A bid-ask spread can measure the stock’s liquidity. It denotes the amount the selling value (ask price) exceeds the buying value (bid price). Stocks with more liquidity on several exchanges have narrower bid-ask spreads. This makes it simpler for investors to buy and sell the stock at any time.
- Multinational Corporations – Additionally, multinational companies frequently list on multiple exchanges. These businesses can list their shares on both their national exchange and significant exchanges abroad. Through cross-listing, international firms can access a bigger global pool of possible investors. They can draw investors from different nations and areas interested in their industry or business operations. The company gets more access to global financing, opening up funding and economic development prospects.
How does this exchange happen?
A foreign stock market will accept depositary receipts (DRs). A DR is a negotiable certificate that represents equity shares in international corporations. It enables foreign market investors to trade company shares without possessing the underlying securities.
In India,, the following two types of DRs are frequently used:
- IDRs (Indian Depository Receipts) – IDRs are traded on local platforms, such as the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). These DRs allow local investors to participate in overseas firms while allowing Indian businesses to access the domestic investor base. IDRs are often issued in Indian Rupees.
- GDRs (Global Depository Receipts) – GDRs are issued by Indian organisations but traded on international markets such as the London Stock Exchange (LSE). Although it may resemble an American Depository Receipt (ADR), the stocks are from outside the U.S. GDRs allow Indian businesses to attract foreign capital and increase their shareholder base outside of the country. GDRs are often priced in foreign currencies like the US Dollar, Euro, or other currencies.
To conclude
A company that cross-lists might have to pay more to comply with the rules and conditions of the exchanges and nations they want to be listed on. Investors must take the fees of trading cross-listed shares into account.
Fee structures for trading commissions, foreign exchange fees, and clearing costs differ between exchanges. Before engaging in cross-listed trading, these expenses should be carefully considered as they may affect prospective profits.
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