What is a direct listing and how can you invest?
Direct listings are a cost-effective alternative for companies looking to go public. Still, the company will have increased exposure and liquidity, like any other listed firm. Learn more here.
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What is a direct listing?
A direct listing, or direct public offering (DPO), is a process that a private company can follow to become publicly listed without going through a traditional initial public offering (IPO). Direct listings are characterised by some key points that set them apart from IPOs, such as not needing the services of an underwriter, lower costs and, typically, listing existing shares.
Direct listing vs IPO
Direct listings and IPOs differ in several ways, but ultimately, they are both vehicles to going public. Here are the main differences:
|Existing shares are listed on the chosen stock exchange*||New shares are created and listed on the chosen stock exchange|
|No underwriter is appointed by the company||One underwriter (or more) facilitates the IPO process, including issuing of stock|
|Costs are lower compared to IPOs, but there’s no assurance that shares will be sold||IPOs are the costlier alternative, which comes with the guarantee of selling a specified number of shares at the initial price|
|Market demand determines the share price – this can lead to increased volatility||The initial share price is determined using relevant valuation techniques|
|A book building process is not required||The underwriter conducts the book building process|
|No lock-up period – shareholders can start selling their shares on the public market straightaway||Existing shareholders are subject to lock-up restrictions, meaning that they cannot sell their shares for a certain period, usually between 90 and 180 days|
* Usually, only existing shares are listed in a direct listing. However, in December 2020, the New York Stock Exchange (NYSE) got approval from the Securities Exchange Commission (SEC) to include newly issued shares in direct listings.
Another way for companies to go public is via a special purpose acquisition company (SPAC) merger, also known as a reverse takeover. In this process, the private company merges with a SPAC, which is already publicly listed and has no active business operations.
How does a direct public offering work?
Direct public offerings involve a series of phases. Below are some of the main steps:
- Hiring of financial advisors
The financial advisors assist with defining objectives, regulatory filings, public communications, and more. However, the company essentially facilitates its own listing process (it doesn’t need to hire an underwriter)
- Exchange commission filing
Filing with the relevant exchange commission ensures that investors can access information that they might need about the company. All regulatory and exchange requirements must be met in order to proceed
- Investor day is held
Investors are informed about the business and the share offering at this event. Investor day is open to everyone
- Initial reference price is set
The financial advisor works with the exchange-appointed market maker to determine the initial reference price
- Reference price is assigned
The market maker assigns a demand-based initial reference price to the direct listing, however the opening price may be different
- Shares are listed
Listing of company shares happens on the chosen stock exchange
- Shares trade on the public market
The share price is dependent on market demand
How can you trade or invest in a direct listing?
With us, you can trade in a direct listing right away from the day of listing. You’d trade or invest on the secondary market. Shares are available from 8am on the day the company goes public for UK as well as international listings, excluding US listings. US shares become available a few hours after the company has listed, as is the case with all brokers.
Trading enables you to speculate on companies’ share price movements using financial derivatives such as CFDs. Investing means buying and owning the underlying company shares.
How to start trading with us
- Create a CFD trading account, or log in
- Search for the relevant company on our trading platform
- Select ‘buy’ or ‘sell’ in the deal ticket
- Set your position size and take steps to manage your risk
- Open and monitor your position
You’ll use leverage when trading CFDs with us. This means that you’ll only need an initial deposit, known as margin, to open your position. Leverage increases both profits and losses to the full value of the trade, making it essential for you to take steps to manage your risk properly.
Why do companies choose direct listings?
While individual circumstances affect a company’s decision to go public, there are various features that make direct listings appealing to companies, and suited to their needs. These include:
- It’s a cost-effective alternative
- The risk of mispricing can be mitigated by supply and demand
- Increased exposure and equal access to shares: investor day is open to everyone and all investors can buy shares at the initial price
- Reaching the same end point offered by an IPO, with widespread visibility and increased to liquidity
- Allowing existing shareholders to sell their shares at the initial price, if they wish to do so
Direct listings summed up
- A direct listing is a way in which a private company can go public
- Other ways in which companies can go public are via a traditional IPO and a SPAC merger
- There are several differences between the vehicles of going public
- Direct listings follow a process that includes hiring a financial advisor, hosting an investor day, and more
- You can trade and invest in a direct listing with us
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The information/research herein is prepared by IG Asia Pte Ltd (IGA) and its foreign affiliated companies (collectively known as the IG Group) and is intended for general circulation only. It does not take into account the specific investment objectives, financial situation, or particular needs of any particular person. You should take into account your specific investment objectives, financial situation, and particular needs before making a commitment to trade, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit.
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