IPO & DPO stocks: Two types of new issue offerings
Learn about the different types of new issue stocks and how to invest in them.
What is an Initial Public Offering (IPO)?
An Initial Public Offering, or IPO, is when a private company sells shares to the public for the first time, commonly referred to as "going public." The IPO-issuing company becomes publicly traded 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.
IPO basics: What investors should know
An Initial Public Offering (IPO) refers to when a private company becomes a public company by issuing stock to the general public for the first time. This involves working with an investment bank to underwrite and manage the stock issuance. Before a company can go public, it must file a detailed Tooltip with securities regulators, providing comprehensive financial information to potential investors.
It is important to note that IPO-issuing companies lack a trading history in the public markets and may not have extensive historical financial results. Investors are advised to approach these opportunities with a cautious and well-informed perspective, carefully evaluating the company's current financial health and future growth potential.
Getting started with IPOs
Schwab offers eligible clients access to new issue equity offerings, including IPOs. Visit the IPO Trade page for more information about getting started with IPOs, including a calendar of offerings, steps to participate, IPO policies, and more. Clients can also opt in to receive notifications when new issue offerings become available.
Interested clients should be aware that investing in an IPO involves significant risks. In order to participate, you must have certain investment objectives with sufficient investment knowledge and experience, complete an eligibility questionnaire, and meet a minimum household benefits balance. Meeting the general eligibility requirements does not guarantee clients will be eligible for every offering. Additional offering-specific requirements, account restrictions, and funding requirements may apply.
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Frequently Asked Questions about IPOs (Initial Public Offerings)
IPO stock refers to equity shares of ownership in private companies that become available to the public for the first time through an Initial Public Offering (IPO). This process allows investors to buy into a company's growth story as it transitions from private to public ownership, commonly referred to as "going public."
A company uses an IPO to raise capital for growth or expansion, to pay off debts, or to increase market visibility. Going public also gives the company access to a larger pool of investors and provides liquidity for early shareholders.
Schwab clients interested in getting access to an IPO can opt in to receive notifications when new issue offerings become available. Log in to sign up.
IPO offerings involve significant risks and are subject to eligibility requirements. In order to participate, you must have certain investment objectives with sufficient investment knowledge and experience, complete an eligibility questionnaire, and meet a minimum household benefits balance. Additional offering-specific requirements, account restrictions, and funding requirements may apply. Visit the IPO Trade page for more details.
If you are interested in getting access to an IPO at Schwab, you'll first need to open a brokerage account. You'll then need to add sufficient funds to your account. If you're interested in a specific IPO, consider opening and funding your account as early as possible, as offering deadlines and eligibility requirements may apply.
IPOs are far more common than direct listings (DPOs). IPOs are the primary method companies use to raise capital through a public offering, whereas DPOs are a more niche and less established alternative.
An IPO is the process a private company uses to become publicly traded by offering shares to investors for the first time—often to raise capital, pay down debt, or provide liquidity for early shareholders. The company works with underwriting investment banks to file the required disclosures with the SEC, then holds a roadshow to market the offering, gauge investor demand, and help set an initial share price. Underwriting investment banks and brokerage firms help make shares available to eligible investors. Once the offering is complete, shares begin trading on a public exchange, where prices are set by market supply and demand.
IPO stocks can offer the opportunity to invest in a company early in its public journey, but they also come with higher risk and uncertainty compared to exchange traded stocks. Newly public companies often have a limited operating history, which can make their stock prices harder to evaluate and more prone to significant swings in the early days of trading. Whether an IPO is a good investment ultimately depends on the specific company, market conditions, and your individual goals and risk tolerance—so it's important to evaluate each offering carefully before investing.
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 initial public offering (IPO).
Instead of raising new outside capital like an IPO, a DPO enables a company's employees and investors to 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.
DPO basics: What investors should know
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 | |
|---|---|---|
| Who uses them | Generally attractive to larger companies and are the most common method of issuing new shares | Generally attractive to smaller companies |
| How shares are offered | Issuing company typically relies on underwriters (including investment banks and brokerage firms) to distribute shares to investors | Issuing company offers the shares directly to the public or lists them on an exchange without an underwriter involved |
| Offering size | Based on the amount of capital the issuing company wants to raise and the estimated price per share (determined by the issuing company and underwriters) | Based on the number of existing shares the issuing company wants to release, influenced by factors like company goals and total estimated value of the offering |
| Share availability | Shares are offered to select investors before they begin publicly trading | Shares are offered to all investors when they begin publicly trading |
| Pricing at launch | Price is set by underwriters before public trading opens | Price is determined by market demand when public trading opens |
Frequently Asked Questions: IPOs vs. DPOs
An IPO raises capital by issuing new shares to the public, typically with the assistance of investment banks known as underwriters. In a direct public offering (DPO), or direct listing, a company becomes publicly traded by listing existing shares on an exchange, often without issuing new shares. As a result, IPOs are commonly used to raise capital, while DPOs primarily provide liquidity for existing shareholders.
In a DPO, a company's existing shares begin trading directly on an exchange. Current shareholders, such as founders, employees, and early investors, may sell their shares to the public once trading starts. Unlike an IPO, there is no underwriting process, and the market determines the share price through investor demand and available supply.
Companies may choose a DPO when they want to become publicly traded without raising additional capital. A DPO can reduce underwriting costs and provide liquidity to existing shareholders. This approach is often associated with companies that have strong brand recognition and do not need the marketing and pricing support typically provided by underwriters.
A direct listing (DPO) is not necessarily a safer investment than an IPO—they simply have different characteristics and risks. In a DPO, there is no underwriting process, so the opening price is set entirely by market supply and demand when trading begins. In an IPO, an initial price is established before trading starts, though shares can still be volatile once they begin trading. Ultimately, both IPOs and DPOs involve risk. It's important to consider the specific company, market conditions, and your individual goals and risk tolerance before investing.
Participating in new issue stocks has unique drawbacks that can adversely affect your investment.
IPOs come with distinct challenges that can impact your investment, such as:
- IPOs often lack a prior market, which exposes investors to significant price uncertainty before the issue and potential price volatility after the new issue hits the market.
- Companies that issue IPOs are often smaller, newer, and lack operating history, making them riskier investments compared to more established publicly traded companies.
- If the company opts for a follow-on offering of additional new shares after the IPO, the value of your existing investment could be diluted, potentially reducing its overall worth.
DPOs also have unique drawbacks that can adversely affect your investment, including:
- Since DPO shares are offered directly on the open market, with the opening price subject to supply and demand, investors could be exposed to additional risks such as low liquidity, price volatility, and uncertainty.
- 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.
