Key Difference – Listed vs Unlisted Company
Listed and unlisted are the two basic types of companies. While profit maximization is the main objective of both, there are many differences between listed and unlisted companies depending on the size, structure and methods of raising capital. The key difference between listed and unlisted company is their ownership; listed companies are owned by many shareholders whereas unlisted companies are owned by private investors.
What is a Listed Company?
Listed companies are the companies that are listed on a stock exchange where its shares are freely tradable and investors can purchase and sell shares at their discretion. Such investors become shareholders of the respective company upon the purchase of shares. A company may be listed on the Main Market of the stock exchange (suitable for bigger and more established companies) or the Alternative Investment Market (much suited for relatively new companies). All capital markets have local stock exchanges while large scale international stock exchanges such as the New York Stock Exchange (NYSE) and the London Stock Exchange (LSE) trade in millions of shares on a daily basis.
The decisions of listed companies are taken by the board of directors appointed by the shareholders, which comprises of both executive and non-executive directors. Board compositions are often specified and governed by various corporate governance requirements. The decisions should be communicated to the shareholders in a timely manner and board resolutions should be passed in taking certain important decisions. Shareholders are entitled to two forms of returns by investing in a listed company. They are,
Dividends
This is a sum of money paid at regular intervals by a company to its shareholders out of its profits. Some shareholders prefer to cash in the dividends while others prefer to reinvest the sum of money they are entitled to in the business which is called the dividend reinvestment concept.
Capital Gains
Capital gains are profits earned from the sale of an investment and these gains are subjected to specific requirements.
e.g.: If an investor purchased 100 shares of a company at $ 10 each (value = $ 1000) in 2016 and if the share price in 2017 has increased to $ 15 each, the value in 2017 is $ 1500; the investor will gain a profit of $ 500 if the shares are sold in 2017.
Listed companies are subjected to various rules and regulations and have specific requirements to meet in terms of preparation of financial statements. There are standardized formats for main financial statements such as the income statement, statement of financial position, statement of cash flow and statement of changes in equity. Furthermore, the said statements should be prepared and presented according to the Generally Accepted Accounting Principles (GAAP).
One of the principle regulatory acts developed with regard to the reporting and disclosure requirements of the listed companies is the Sarbanes–Oxley Act of 2002, which was developed to protect the interests of the investors. In the course of past few decades, such regulations continued to be stringent due to the massive corporate scandals that took place such as Enron (2001) and WorldCom (2002).
New York Stock Exchange
What is an Unlisted Company?
Unlisted companies are companies that are not listed in stock exchanges, therefore are privately held. Since they are not listed, they do not have the opportunity to raise finance through share offer to public investors. Instead they can issue shares to known parties such as family and friends in order to raise equity. The trading of shares are “over the counter” where the specifications of the deal can be made according to the requirements of the parties involved (buyers and sellers); thus, the exchange of controls that is found in stock markets is avoided. Unlisted companies exert better control over their business operations.
It is not mandatory for a company to be listed to be successful. Unlike in listed companies, the reporting requirements of financial results are not subjected to strict regulations, thus are flexible and less complicated.
World’s largest greeting cards producing company Hallmark (founded in 1910) is still privately held.
What is the difference between Listed and Unlisted Company?
Listed vs Unlisted Company |
|
| Listed company is a company that is listed on a stock exchange where its shares are freely tradable. | Unlisted company is a company that is not listed in stock exchange. |
| Ownership | |
| Listed companies are owned by many shareholders. | Unlisted companies are owned by private investors such as founders, founders’ family and friends. |
| Liquidity of shares | |
| Shares are highly liquid since there is a readily available market. | Shares do not have a readily available market; thus they are illiquid. |
| Valuation | |
| Value of the company can be easily derived since the market value can be easily calculated. | Due to the unavailability of a market price, valuing the company is often ambiguous and sometimes the market value of a proxy listed company should be used to arrive at a suitable market value. |
| Regulatory Requirements | |
| Listed companies have complicated and stringent regulatory requirements. | Unlisted companies have less complicated and stringent regulatory requirements compared to listed companies. |
Reference List:
Corporate Governance Recommendation for Listed Companies. N.p.: the central chamber of commerce of Finland, Dec. 2003.
“FAF, Financial Accounting Foundation.” Public Companies. N.p., n.d. Web. 27 Jan. 2017.
Silverstein, Ken. Enron, Ethics And Today’s Corporate Values. 14 May 2013. Web. 27 January 2017.
Schaefer, Steve. “The World’s Biggest Stock Exchanges – pg.1.” Forbes. Forbes Magazine, 19 Aug. 2011. Web. 27 Jan. 2017.
Image Courtesy:
“NYSE” By Kevin Hutchinson – Flickr (CC BY 2.0) via Commons Wikimedia
“Hallmark logo” By Hallmark Cards; crown designed by Andrew Szoeke – Traced from [2] (Public Domain) via Commons Wikimedia