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What is a secondary listing and what does it mean for investors?

Jul 02 2018 14:25
Simon Brown

I often refer to the global nature of JSE-listed shares as earnings of the large stocks are mostly from beyond our borders. 

This means that while the JSE is our own homegrown exchange, it really is global in nature.  

But there is another important aspect to the global nature of our market, and that is dual listings: some stocks trade not only on the JSE, but also on other exchanges around the world.   

Taking it still a step further is that many locally listed stocks have their primary listing on another exchange while the JSE listing is a secondary listing.  

This has a number of implications for investors on the JSE. 

But first let us understand how this works.

A stock listed on two different exchanges will in most cases be fungible – in other words you could, for example, buy British American Tobacco here in South Africa in rands and sell it in London on the LSE in sterling. 

Now exchange controls prevent private clients from doing this, but it does mean that the price of the two shares on the different exchanges will be kept in sync – taking exchange rates into account. 

The question then is where the real price of the stock is. Usually, whichever exchange has the higher value of trade will set the price. 

So British American Tobacco’s price will be set in London and the JSE price will follow. This can be skewed a fair bit by trading hours; for example, when the LSE only starts its day at 10:00 SA time, we get an hour to set our own price before they open. 

But ultimately the shares will trade in sync because if they don’t, traders will arbitrage the prices by buying on one exchange and immediately selling on the other (and profiting from any price difference).

For traders there is a debate around whether one should be charting the primary chart as that is the leader. 

Personally, when I was trading equity, I always just charted the local share as that share still had all the information, and also took into account the exchange rate.  

Turning to the primary exchange, this has importance in terms of the rules the company follows, as well as the currency that results are reported in. 

For example, Steinhoff has a primary listing in Frankfurt so while it is in breach of JSE rules for the late submission of their results (due end January 2018), the company is not in breach of the Frankfurt rules. 

As such, Steinhoff continues to trade there and the JSE has not suspended the share.  

Reporting currency does matter and we’ll convert the results back to rands as that’s the currency we invest in. But the rest of the world will focus on the reporting currency. 

So, a weaker rand may make British American Tobacco results look great, while they may be more modest in sterling; and the market will care about the more modest sterling results.  

Lastly, in the US we have American Depository Receipts (ADRs). This is effectively a dual listing, but with a twist: the ADR listing in the US will be a certificate, rather than an actual share. 

This makes it easier and cheaper for stocks to list in the US without requiring all the regulatory process that could rack up serious costs for the company.  

As an investor, dual listing – or foreign primary listing – is not a major concern in my selection process. 

I am always mindful of the fact but, ultimately, I remain a fully-fledged shareholder entitled to my profits, and the dual listing of many of our larger companies means I can easily access offshore stocks and profits.

This article originally appeared in the 5 July edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

investment  |  portfolio  |  stock exchange
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