How companies go public
Today on the blog we would be looking into Direct listing, which is one of the ways people take their companies public and make their shares available for the public to buy and sell.
One very recent and popular trend by companies who want to raise capital is to go public. Increasingly, of the options available, a particularly convenient and useful option has emerged as a trend. It is called a Direct Listing or a Direct Public Offering. Notable companies that have gone public in the past using Direct Listing are Spotify and Slack. Understanding the risks and opportunities could yield good returns on your investments from a company that is directly listed to the stock market.
What is Direct Listing?
A Direct Listing allows a company to circumvent procedures that might delay its liquidation goals. In a direct listing, a company offers its stocks or shares to the public while avoiding third-party investment banks known as underwriters. It gives the company the chance to skip an Initial Public Offering (IPO), which could involve more than three months in procedures and the bank charges of the underwriters. With a direct listing, the existing stocks of employees and investors are made available to the public to be traded. Employees and investors usually convert their ownership into a stock that can be listed on the stock exchange. The opening stock price is subject to market forces of demand and supply and swings in either direction. In all, it is cheaper than an IPO, risker, more volatile, and has higher growth potential.
What Does a Direct Listing Entail?
A direct listing is usually interested in liquidity and hence would sell existing stocks of employees and shareholders rather than issue new stocks. This is because new capital is not the goal, as issuing new stocks would have helped to do this.
In Direct Listing, companies save cost and time by skipping underwriters who work for large investment banks. What underwriters do is buy the stocks at a discounted price and then sell it.
With a Direct Listing, a predetermined number of shares and price per share are not available before the listing. The stocks can be traded on the day they are available on the stock market depending on the number of shares the shareholders’ list on the market. The pricing is then determined by the market forces.
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How Do I Benefit From a Direct Listing?
If you are an existing shareholder, there may be good news for you if your company decides to engage in the direct listing. You can freely trade your shares for liquidity publicly. Since the costs of engaging in a Direct Listing or a Direct Public Offering (DPO) is much lower, the costs of your shares can reach higher values but your stock prices are more volatile and prone to losing value. But it may be good news since there is usually no limit to the value of your stocks except the ones set by demand and supply.
If your company is choosing a DPO, you should have a good idea of what kind of company it is. It would probably be popular and attractive enough to sell on its own without having to use a third-party guarantor and advertiser. If you are aiming to buy stocks in this company, there is a likelihood of it having high growth potential. You must be watchful though. Find out information about their financial records as this is beneficial to you.
Conclusion
A Direct Public Offering or Listing is one of the most interesting investment options for an existing shareholder and can represent a new potential for high returns for new investors. Understanding it and knowing when to invest in it holds the potential for a great investment.
