Difference between IPO and Direct Listing

Initial Public Offering (IPO)

Initial public offerings (IPO) is defined as a method for any company to help raise capital for their company by the listing of shares on a public exchange market. In any IPO, the new shares of a company get created, and they are underwritten by one of the intermediaries. The underwriter also works closely with the firm throughout the process of IPO for helping with regulatory requirements, deciding the initial offer price for the shares, buying available shares from the company and selling them to investors via distribution networks. Their network comprises of broker-dealers, investment banks, mutual funds as well as insurance companies. Prior to the start of the IPO, the company and their underwriters take part in a process known as a ‘roadshow’ where the top executives of the firm present their company to the institutional investors to generate interest in purchasing the stocks. Based on the interest levels of potential investors, the underwriters set a realistic price of the stock for the IPO. They may also provide guarantees for the sale of a specific number of stocks at initial prices apart from purchasing stocks in excess.

Direct Listing

A direct listing is defined as a method for any company to help them raise capital by the process of listing shares in a public exchange market. The companies that want to do a direct listing may sell their shares directly to the public without taking the help of any of the intermediaries. It does not involve other intermediaries or underwriters as there are no new shares that are issued, and neither is there a lockup period. The existing promoters, investors or any other employees who are already holding the shares of a company can sell their shares directly to the public.

However, there are certain risks with the zero to the low-cost advantage that trickles down to the investors. There are no support or guarantee mechanisms for the no promotions, sale of shares, no safe long term investors and no defence by the large shareholders against the volatility in share pricing during or after the listing of shares.

Difference between IPO and Direct Listing

There are some major areas of difference between IPO and direct listing, and we should focus on those points below to get a more varied perspective of these two instruments:

IPO

Direct Listing

Definition

In any IPO, the new shares of a company get created, and they are underwritten by one of the intermediaries called underwriters.

The companies that want to do a direct listing may sell their shares directly to the public without taking the help of any of the intermediaries.

Intermediaries

There are intermediaries in the process of an initial public offering.

There are no intermediaries in the process of a direct listing.

Conclusion

There are a number of points of difference between IPO and direct listing. But both of them perform a very important part in the functioning of the financial markets. It then becomes totally essential that a number of people and corporations use these instruments to make financial gains from the public exchange market. Both these financial instruments have a necessary role in the development and growth of the economy of a country, both in the short as well as the long run.

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