IPO stands for initial public offering. It refers to a corporation offering shares of its stock for sale to the general public. IPOs or initial public offerings are done through stock exchanges such as the New York Stock Exchange and the Chicago Stock Exchange.
The process for an IPO is somewhat lengthy. It also requires the corporation planning to go public to hire the services of an underwriter. The underwriter takes care of much of the work required before a company can list its shares for sale to the public on a major stock exchange such as the New York Stock Exchange.
An underwriter is usually but not always an investment banking firm such as Morgan Stanley. The underwriter prices the stock for the corporation, determines when it will be launched, generates interest for the stock, complies with rules and regulations, files paperwork, and is responsible for the actual sale of the stock when it is initially launched. In exchange for these services, the underwriter usually takes a commission of about 2-8% of each sale of stock.
What is a Direct Listing?
A direct listing also offers shares of company stock for sale to the public. It does this without the services of an intermediary that prices, advertises, and sells the stock as in an initial public offering. The direct listing can be thought of as a faster, more direct way for a company to offer shares of company stock for sale to the public.
The Major Differences Between an IPO and a Direct Listing
When a company undertakes an IPO, it is selling new shares of stock that have just been created. A direct listing only sells existing company stock. No new shares are created in a direct listing. This is one of the key differences.
For a direct listing to work, current shareholders (often company founders and employees that own company stock) must be willing to sell their existing shares in the company. This is in contrast to an IPO where new shares are offered for sale.
The underwriter does much of the work in an IPO, but they charge a fee for their service. A direct listing does not need an underwriter and saves money in this regard. However, a direct listing may be more challenging because the company may lack the expertise and time to price, market, and sell its existing shares to the public.