What’s the difference between IPOs and Direct Listings?

A company can raise money by listing its shares on stock exchanges through IPOs or Direct Listings. Let’s find out together how you can know one from the other.

Initial Public Offerings – short definition

When companies go public through #IPOs, they generate new shares which are sold to investors. Now, businesses have to hire helping intermediaries (underwriters) to help them with the listing job.

These underwriters are usually world-renown banks like Goldman Sachs or Morgan Stanley, and they advise companies in many different areas. Included here are regulatory requirements and pricing of shares.

#Bumble, #Kuaishou or Oscar Health Insurance are some of the latest examples of companies going public through Initial Public Offerings.

Learn more about IPOs:

The biggest IPOs of 2020

How to invest in IPOs

Why trade IPOs

Direct Listings – short definition

Direct listings are alternatives for #IPOs. Should they choose direct listings, companies don’t have to worry about paying underwriters, avoiding potentially expensive agreements. The disadvantage? Share prices will be dictated by supply and demand. The more interest they draw, the better for the business!

Offering existing shares directly to the public, with no intermediaries, could be a viable solution for anyone holding a stake in a company to create extra liquidity, boosting the stock’s valuation.

#Slack and #Spotify are two relevant examples of companies going public via Direct Listings.

IPOs and Direct Listings – summing up the differences.

1. Underwriters (or lack of)

In traditional IPOs, underwriters play a major role, as they take part in investor meetings and sell shares to the public. For all this hard work, they get paid via commissions.

In a direct listing, companies sell shares directly, without underwriters. They just employ financial advisors, paying them a fixed sum of money.

2. The distribution of shares

IPOs help companies raise money for their particular needs, such as expansion, research, development, etc. They do that by selling new shares. Direct listings don’t work like that, as they just provide support for shareholders to increase liquidity by selling current shares.

3. The pricing of shares

IPOs allow you and other investors to buy shares at a price set by companies. Direct listings are trickier, as the stock’s price will depend on supply and demand.

4. Investor Guidance

In an IPO, companies use in-depth planning (using roadshows), promoting their stocks to investors to raise interest and get the markets pumped up. However, they cannot provide financial guidance on how to invest.

As for Direct Listings, businesses are allowed to offer financial guidance. They generally announce their decision to go public on Investor Day. *

* A meeting where management gives analysts and current and potential investors a deeper dive into their results, strategy, culture, or plans.

IPOs or Direct Listings – which one is better?

Both IPOs and Direct Listings can be great opportunities for traders you included. To make sure you never miss your chance to trade the next big thing, follow the latest companies going public!

Sources: investopedia.com, news.crunchbase.com, techpa.net.