IPO and Direct Listing: Stock Market Guide

A business can raise funds by listing shares on a public exchange: Direct Listing and Initial Public Offerings. While many businesses decide to conduct an IPO, in which companies form new shares, underwrite, and offer them to the public. On the other hand, some businesses choose to go with a direct listing, where companies produce no new shares and just sell the currently outstanding shares without the involvement of underwriters.

What is IPO?

Throughout the IPO process, the underwriter collaborates closely with the firm to determine the first offer price of the shares. Then, they assist with regulatory procedures and purchase any available shares from the company.  Later on, they resell them to investors through their distribution networks. 

Their network consists of insurance firms, mutual funds, broker-dealers, and investment banks. The underwriters can determine a reasonable IPO price for the stock by assessing the interest from network users. Additionally, underwriters can guarantee the sale of a certain number of stocks.  

What is Direct Listing?

Instead of issuing new shares, a firm might go public by selling its existing ones through a process known as a direct listing. Companies that want to go public by direct listing have different intentions than those that do so through an IPO. Without any intermediaries, the company sells shares to the general public through a direct listing process (DLP). No underwriters or other middlemen are involved, no new shares are issued, and there is no lockup period.

IPO vs Direct Listing

  • Purpose – Employees and shareholders sell their current equities to the general public in a direct listing. A company sells a part of itself during an IPO by issuing new shares. New shares are not required because companies that go public via a direct listing do not want to raise more money.
  • Public Awareness – Companies looking to raise funds do it through an IPO for investment or expansion. Companies that list directly, in contrast, may be looking for something other than funding, like enhanced liquidity for current owners.
  • Anti-Dilution – Direct listing avoids issuing new shares for businesses with sufficient capital. They only look out to get listed on a stock exchange. 
  • Liquidity – In a standard initial public offering (IPO), investors have a 180-day lock-up period before shares may be sold. Whereas, in a direct listing, current shareholders can sell their investment beginning on the first day of trade.
  • Demand– A direct listing resembles an unconstrained auction where the market chooses the price. On the contrary, an IPO sets a preset pricing range.

Bottom Line

We hope we have successfully educated you on Direct Listing and IPOs. If you want to invest or trade online, India’s best online trading platform is the Shoonya app. A multi-asset trading platform where you can trade and analyse the company and its risk factors with advanced comparability tools. 

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