Finder is committed to editorial independence. While we receive compensation when you click links to partners, they do not influence our content.
Direct listings vs. IPOs
What is the difference between an IPO and a direct listing?
Updated
Most private companies go public via an initial public offering (IPO). But direct listings offer a more direct route for some companies.
What's in this guide?
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.
Compare stock trading platforms
*Signup bonus information updated weekly.
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.
Stock | Current Market Price | 1-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
More guides on Finder
-
Vanguard competitors
If you’re looking for a broker comparable to Vanguard, check out these five contenders.
-
5 key TD Ameritrade competitors
Thinking of switching from TD Ameritrade? Here are 5 apps like TD Ameritrade that offer valuable benefits.
-
5 best overwater bungalows in Thailand
Our picks of the best overwater stays in the Land of Smiles from budget-friendly to luxurious.
-
How to buy Reserve Rights Token (RSR)
This guide will show you step-by-step instructions on how to buy the Reserve Rights (RSR) token as well as a list of exchanges you can trade it on.
-
How to buy Curve DAO Token (CRV)
This guide will show you step-by-step instructions on how to buy the Curve (CRV) token as well as a list of exchanges you can trade it on.
-
Acorns alternatives
Acorns alternatives offer lower fees and more investment options. Learn more.
-
These are the comfiest sweats I’ve worn — and they’re from a sustainable children’s brand
Hanna Andersson’s Organic Cotton Long John is comfortable and available in family sizes. Here’s what I thought of the fit, and details on sustainability.
-
Where to buy protective masks for wildfire smoke
Find in-stock face masks for wildires, smoke and dust, see our top picks and read tips for using respirator smoke masks.
-
Bitcoin price recovers but the bloodbath may not be over
The Chairman of Dubai’s IBC Group has pledged a whopping $4.8 billion into Bitcoin, as Microstrategy purchases another $1 billion of BTC.
-
How to buy Maker (MKR)
This guide will show you step-by-step instructions on how to buy the Maker (MKR) token as well as a list of exchanges you can trade it on.
Ask an Expert