What is an Initial Public Offering (IPO)?
An Initial Public Offering, or IPO, is when a private company decides to "go public" and become a publicly traded company by offering shares on a stock exchange such as the New York Stock Exchange (NYSE) or Nasdaq.
Private companies go public for a variety of reasons, the main one being to raise capital to reinvest and grow the business.
What you should know about IPOs
IPOs refer to private companies working with an investment bank to underwrite the issuance of stock. Any company intending to IPO must file a Tooltip with securities regulators and supply investors with financial information before listing. However, these companies do not have any trading history in the public markets or lengthy historical financial results, so investors should consider keeping a cautious outlook.
What is a Direct Public Offering (DPO)?
A DPO, also known as a direct listing, is a way for companies to become publicly traded without a bank-backed IPO.
Instead of raising new outside capital like an IPO, a company's employees and investors convert their private ownership into publicly traded stock. Existing investors can cash out unrestricted stock at any time without the "lockup" period of traditional IPOs.
What you should know about DPOs
DPOs are an alternative to IPOs in which a company does not work with an investment bank to underwrite the issuing of stock. Although forgoing the services of an underwriter provides a company with a quicker, less expensive way to raise capital, the opening stock price will be completely subject to market demand and potentially volatile market swings.
When a company directly lists on the open market, clients have no eligibility requirements or forms to fill out. The only requirement is to have sufficient capital in your account to purchase stock.
Once the stock is listed, shares can be purchased by the general public in the same way any other stock is purchased.
Comparing IPOs and DPOs side by side
Explore the differences between IPOs and DPOs
Comparing IPOs and DPOs
| Initial Public Offerings | Direct Public Offerings |
|---|---|
| Shares are offered before the market opens | Shares start trading on an exchange with no previously issued shares |
| Not all investors may have access to the listed shares at first | Everyone has access to the shares at the same time |
| The issuing company typically relies on an underwriter | The issuing company does not utilize an underwriter |
| The underwriter advises on the terms of the offering | The issuing company proceeds without underwriter assistance |
| Generally attractive for larger companies | Generally attractive for smaller companies |
| Process typically takes more time | Process is usually faster |
Participating in new issue stocks has unique drawbacks that can adversely affect your investment.
IPOs have unique drawbacks that can adversely affect your investment, including:
- No prior market for the new issue exposes investors to price uncertainty (prior to issue) and potential price volatility (after issue).
- New issue companies are often smaller, newer, and lack operating history, making them riskier investments compared to more established publicly traded companies.
- If the company decides to do a follow-on offering of additional new shares after the IPO, the value of your investment could be reduced.
DPOs also have unique drawbacks that can adversely affect your investment, including:
- Since DPOs are not traded on listed exchanges (though some trade in over-the-counter markets) and usually have limited investor participation, they are not as liquid as exchange-traded investments.
- DPOs may not be required to provide the same level of information as IPOs and publicly traded companies, which can make it difficult to assess the health of the issuing company.
- Potential for immediate insider selling, as there may not be any lockup provisions.
- DPOs are typically issued by smaller, less-established companies with shorter operating histories and untested management teams.