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Direct listings vs. IPOs

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

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By

Javier Simon

Updated

Fact checked

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?

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, it may be difficult to access these. 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 brokerage account such as TD Ameritrade or Robinhood. 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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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.

StockCurrent Market Price1-Year Change
Spotify$331.41+$183.00 (+123.74%)
Slack$42.63+$20.50 (+92.55%)
Asana$39.57+$10.80 (+37.40%)

*Some of these companies have been public for less than five years. The 5-year change reflects the change since they went public.

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

Who can invest in IPOs and direct listings?
Technically, anyone can. But it may be easier for retail investors to invest in companies that went public via a direct listing. The first shares following an IPO are usually reserved for institutional investors.
A company announced its IPO. Why can’t I invest in it?
There’s usually a lot of media hype surrounding companies that mention they may be heading toward an IPO. But before you can invest in these companies, their stocks need to trade on a public exchange. This can take some time even after the IPO has closed.
What companies are expected to go public via IPO in 2022?
Check out our listing of high-profile IPOs to watch in 2022.

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