It wasn’t long ago that the prospect of investing in the stock market seemed like something only experienced and high-performing Wall Street types could handle. But the Internet has opened up this world of opportunity to investors of all levels—even to those without huge sums of disposable income. With the right research and shopping around, investing in a publicly-traded company—or one that has the potential to enter the stock market—can be a great way to earn some cash. But which companies are best for investing? To make the most out of investing in a public company—and potential stock market entry—it pays to understand which entities are suitable for listing.
The criteria for listing companies on a stock exchange vary greatly, depending on the exchange and the country. But generally, the company must be regulated by the appropriate authorities, have a certain minimum valuation, provide audited financial statements, and operate under the law. Companies must be particularily profitable or well-managed in order to be listed on the markets. In developed countries, many stocks are bought and sold on stock exchanges such as the New York Stock Exchange or the London Stock Exchange. For companies to be added to these exchanges, they must meet certain conditions and regulations. The exchange also evaluates companies on a variety of criteria such as size, liquidity, and growth potential.
One of the key elements to consider is profitability—companies with healthy profits are more likely to receive approval from the exchange. In most cases, companies need to demonstrate profits for at least the three prior years, and those profits must be substantial enough for investors to make a profit. Also, the company must provide full, audited financials which are verified by the exchange. Financials include balance sheets, income statements, and cash flow statements.
Besides profitable financial performance, companies must meet other criteria too, such as a minimum market capitalization that needs to be higher than a certain figure set by the exchange. This helps to ensure the company is big enough to handle significant trading volume. It’s also important for regulators to see that the company’s leaders have the appropriate background and industry experience, as well as a good governance structure. These are considered to be important, as they help to protect investors and ensure the company is as transparent as possible.
Most importantly, companies must have a robust management team and board of directors. This will help to provide assurance that the company is in good shape and that it is compliant with the regulations of the sector or country it is trading in. This is necessary for the exchange to remain competitive and to maintain the public’s trust. Management needs to demonstrate the ability to make strategic decisions that can significantly benefit the company—and its stock price.
Large Profits
It is obvious that corporate profitability affects stock prices, but the ability to draw in large profits is still one of the primary criteria when companies look to be listed on the stock exchanges. Generally, no exchange will list a company that cannot show that it has a sustainable level of profitability. Unless the company can show it has a real potential for profits, it can be difficult for them to become eligible for public listing.
For instance, companies that have seasonality in their turnover can still be listed on the stock exchange, but they must demonstrate consistency and steady profits over several years to prove that the company is financially sound. It’s important to demonstrate to the exchange that the company can fund itself, as this will make investors more likely to invest. Additionally, investors need to feel that the company has strong potential for future growth.
Competitive Advantage
Having an edge over competitors is key to obtaining approval to list on an exchange. Companies must have a unique mission, strong corporate culture, and innovative products or services relative to other companies in the sector. This can give company the edge they need to stand out to potential investors, and the exchanges will look at whether the company is engaged in any unique activities or initiatives that make it stand out.
Exchanges also prefer companies to have intellectual property, such as patents, trademarks, or copyrights. This allows the company to protect its ideas and reinforces its competitive advantage. Additionally, large regional and global growth opportunities can be highly attractive to the exchange, as these can help expand the company’s potential market share.
A Focus on Investors
One of the most essential criteria for any public listing is an emphasis on flexibility. Companies may need to show that they are able to adjust their strategies as needed for the market and for investors, as investors will expect there to be a balance between risk and reward. Companies must demonstrate that they can handle the changes that happen in the stock market. Smart management is essential to this, as a good management team will be needed to anticipate and react to any changes.
Exchanges also require companies to provide regular reports on the financial performance of their business. Companies must show they can provide up-to-date information and accurate financial statements that can be relied upon. These reports allow investors to monitor the financial performance of the company, which makes it more likely that investors will want to buy stocks.
Compliance
When looking to be listed on a stock exchange, companies must comply with the rules and regulations of the exchange and the jurisdiction it is located in. The company must also comply with general laws and regulations governing the business entity. This means that companies must ensure they operate within the legal framework and that they comply with the various external and internal governing bodies.
It is important to note that if a company is looking to be listed in a jurisdiction beyond its home country, additional rules and regulations may be needed to be adhered to. Companies must be aware of any local legislation or regulations that may affect their operations, or the exchange’s decision to accept them, before they go ahead and file to be listed.
Technology
Given the modern world of investing, many stock exchanges now prefer technology-savvy companies. Companies must show that they are taking advantage of the latest technology, whether that’s blockchain or AI, to provide investors with a comprehensive overview of the company’s business practices. The exchange wants to be sure that the company is able to offer the latest insights into its costs, operations, profits, and more. Companies need to show that they’re able to use the latest technology to provide investors with the insights they require for their own due diligence.
Using data analytics and other technologies can also enable investors to better understand the financial performance of the company, and therefore assess the potential return on their investment. Technology also allows the exchange to gain greater assurance that the company complies with its regulations, as the company can show that they have appropriate systems in place. Smart mobile and web applications can also help to update investors on the performance of their investments within the stock exchange.
Regulatory Supervision
Especially when considering international listings, companies must be under the supervision of a regulator. Depending on the jurisdiction, this could be the Securities and Exchange Commission (SEC), the Financial Conduct Authority (FCA), or the Autorité des Marchés Financiers (AMF), among others. Any exchange that is listed on a reputable exchange must be authorized by its respective regulator.
As well as being regulated, the company must also comply with the requisite rules and regulations in the jurisdiction where it is listed. Compliance to these rules is paramount, as non-compliance can lead to suspension of its listings, fines, and other serious implications for the company. Finally, the exchange must also be satisfied that the company does not breach any guidelines including insider trading and market abuse rules.
