What is Dual Listing?
A dual listing refers to a listing of any security on two or more different exchanges. Companies use dual listings because of their benefits, which include additional liquidity, increased access to capital, and the ability for their shares to trade for longer periods if the exchanges on which their shares are listed are in different time zones.
Some exchanges have a number of listing categories for companies that seek a dual listing, each with different requirements and benefits.
A dual listing is the listing of any security on two or more exchanges.
The main advantage of a dual listing is the access to additional capital and increased liquidity.
A popular way for non-U.S. companies to dual list in the U.S. is by using ADRs, or American Depository Receipts.
How dual-listing a security works
The most common way a company dual-lists on U.S. stock market exchanges is through an American depositary receipt (ADR). ADRs hold the foreign shares in a trust account and grant U.S. investors the same rights and upside potential.
ADRs trade on the main two U.S. exchanges, the Nasdaq and the New York Stock Exchange (NYSE). They can also trade on over-the-counter (OTC) markets.
For most ADRs, you can purchase the stock in your online brokerage account as you would any other stock. Some may require a limit order if they trade OTC.
Foreign businesses can choose to list on multiple exchanges without using depository receipts but would likely be required to restate financials and follow stringent U.S. Securities and Exchange Commission (SEC) rules on top of the laws of the business’s home country.
Generally, the price of a dual-listed security is the same (adjusting for currency differences) on both exchanges where it’s listed.
Reasons Behind Dual Listing
A company may choose to have its stock listed on more than one exchange for a variety of reasons.
1. Access to a larger capital base
One of the reasons a company may resort to dual listing is the opportunity to raise more capital. It provides the company with access to a larger investor base.
2. Greater liquidity
Additionally, dual listing increases the liquidity of the traded stock. It is because it allows a larger number of participants to engage in the buying and selling of the stock.
3. More trading time
Furthermore, if a company is listed on an exchange in a different time zone, it provides participants opportunities to trade more often in a 24-hour period.
Prices of Dual-Listed Securities
The price of a security that is listed on more than one exchange should be the same after accounting for the difference in exchange rates. The price remains the same due to arbitrage.
If a security trades at different prices on different exchanges, an individual can earn a risk-free profit by simply buying the security on the exchange where it is priced lower and selling on the exchange, where it is priced higher. It is known as an arbitrage trade.
Such trading activity ensures that any spread between the two prices does not last over a sustained period, and the two prices converge swiftly.
How does dual-listing affect stock price?
On a micro level, dual-listing does not affect stock prices. The prices on the different exchanges will be the same when you account for currency differences and transaction costs.
Over time, having a more liquid stock and the ability to raise more capital for growth could help the stock price go up — but that would only occur if the fundamentals of the business were also getting better.
Advantages and Disadvantages of a Dual Listing
There are numerous advantages of a dual listing. Companies get access to a larger pool of potential investors, which can be beneficial for investors as well.
For example, many Australian and Canadian resource companies list their shares on European exchanges because of substantial investor interest, partly due to the relative paucity of local resource companies.
A dual listing improves a company’s share liquidity and its public profile because the shares trade on more than one market. A dual listing also enables a company to diversify its capital-raising activities, rather than being reliant only on its domestic market.
Among the drawbacks is that dual listing is expensive due to the costs involved in the initial listing and ongoing listing expenses. Differing regulatory and accounting standards may also necessitate the need for additional legal and finance staff.
A dual listing could place more demands on management as well, given the additional time required to communicate with investors in the second jurisdiction through roadshows, for example.