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Direct listings vs. IPOs

What is the difference between an IPO and a direct listing?

Most private companies go public via an initial public offering (IPO). But direct listings offer a more direct route for some companies.

What is a direct listing and how is it different to an IPO?

In a direct listing, a private company’s employees or investors sell existing shares to the public. With an IPO, a private company works with investment banks to create new shares and sell these stocks to the public.

Direct listing companies are usually well-known firms that want to give existing shareholders liquidity, while IPOs are usually companies looking to raise more money. But new rules allow some direct listing companies to also sell newly created shares.

A direct listing is a process in which a private company goes public by allowing its employees or investors to sell their shares of the company’s stock. Unlike IPOs, a direct listing doesn’t require underwriters.

A direct listing also doesn’t involve a “lock-up” period. Some IPOs go through a lock-up period where employees are not allowed to sell their shares.

The direct listing process usually saves a company money because they don’t need to pay fees to investment banks.

What are the benefits of a direct listing over an IPO?

It’s usually less expensive for a company to go public via a direct listing than conducting an IPO. Unlike an IPO, directly listed companies save money on investment bank fees, paperwork and other administrative costs.

The IPO process typically involves investment banks that work with private companies to negotiate fair share prices, among various other tasks. These underwriters then sell the stocks to a larger pool of investors in the public market, usually at a discount.

In late 2020, the New York Stock Exchange (NYSE) allowed direct listing companies to sell newly issued stocks on the exchange. However, these companies must meet the following requirements.

  • Have a market value greater than $250 million
  • Sell new shares above $100 million

What advantages do IPOs have over direct listings?

While it may be easier to buy shares of directly listed companies, the number of shares available can be uncertain. Until recently, a company that went public via a direct listing couldn’t sell shares unless its employees wanted to sell their own. So if nobody wanted to do so on the day the company got listed, there would be no shares available for purchase.

Directly listed companies can sell newly created shares on a stock exchange provided they meet certain criteria. But this is still a new concept.

How can I invest in a company going public via a direct listing?

Before you invest in a direct listing, you need to open a stock trading account with a Canadian trading platform like Questrade, Scotia iTRADE or Qtrade. As soon as the company gets listed on a stock exchange, you can begin buying shares.

You can check if the company has gone public by looking it up via name or ticker symbol. You’ll need a brokerage account to make the trade.

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Name Product Available Asset Types Stock Trading Fee Option Fee Account Fee ETF Transaction Cost Feature Table description
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Wealthsimple Trade
Stocks, ETFs
$0
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Get 2 free stocks when you open a Wealthsimple Trade personal account and deposit and trade at least $150.
Pay no commissions when you trade Canadian stocks and ETFs with Wealthsimple Trade.
Interactive Brokers
Stocks, Bonds, Options, ETFs, Currencies, Futures
Min. $1.00, Max. 0.5% of trade value
$1.50 min. per order
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Extensive trading capabilities and global investment tracking.
Access market data 24 hours a day, six days a week and invest in global stocks, options, futures, currencies, bonds and funds from one single account.
CIBC Investor's Edge
Stocks, Bonds, Options, Mutual Funds, ETFs
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$4.95 - $6.95 (+$1.25 per contract)
$0 if conditions met, otherwise $100/year
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An intuitive and easy-to-use platform with access to a variety of tools that help you make smart decisions and trade with confidence.
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Questrade
Stocks, Bonds, Options, Mutual Funds, ETFs, GICs, International Equities, Precious Metals
$4.95-$9.95
$9.95 + $1 per contract
$0
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Get $50 in free trades when you fund your account with a minimum of $1,000.
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Qtrade Direct Investing
Stocks, Bonds, Options, Mutual Funds, ETFs, GICs
$6.95 - $8.75
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$0 if conditions met, otherwise $25/quarter
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Are directly listed stocks riskier investments than IPO stocks?

Because the price of a direct listing is entirely based on supply and demand, it can be difficult to predict the range at which the stock is traded. Pricing may be more transparent with an IPO. The underwriters of an IPO negotiate a price with the company before investors can buy shares.

What companies have gone public via direct listing?

Here are some well-known companies that have gone public via direct listing and how they’ve performed since they began trading.

StockClosing Price Apr. 12/20211-Year Change
Spotify$293.12+$161.07 (+100.22%)
Slack$42.30+$16.30 (+62.69%)
Asana$34.51+$7.51 (+27.81%)

Bottom line

The main difference between a direct listing and an IPO is that direct listings happen when a company sells existing shares held by employees, and an IPO involves a company selling newly created shares with the help of investment banks.

Retail investors may find it easier to buy shares of companies that went public via a direct listing, but these shares may be more volatile than those of IPOs.

The share price depends on what current employees are willing to sell it for and whether investors are willing to buy it at that price. If nobody wants to buy a share for $100 when the company initiates a direct listing, the price may need to drop before anyone is willing to buy.

With an IPO, an investment bank helps the company develop an initial opening price and buy shares if needed.

Before you begin trading, you’ll need a stock trading account.

Frequently asked questions

Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, CFDs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading CFDs and forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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