Looking to invest in the financial market? Understand the key difference between IPO and Direct listing.

IPO and Direct listing are the two different ways a company can list its shares in the financial market. Understanding the key differences between these methods is crucial for an investor.

Direct Listing vs. IPO

A private company can become public by listing its shares in the financial market. Once the shares are listed, the investor can trade them to make profits as the price increases or decreases. Listing a company's share in the financial market can allow investors to earn profits. However, before investing, the investor must understand the difference between a direct listing and an IPO. Read on to understand the key differences:

Also, read All about IPOs in India.

The objective behind the listing of shares

A direct listing is when a company already has listed shares on one exchange, such as NSE, and wants to list them on another exchange, such as BSE. At the same time, an IPO is when a company lists its shares in the financial market for the first time. 

In the case of a direct listing, the company intends to sell its existing shares to the investors, while in an IPO, the company intends to issue new stocks to the public.

The objective behind IPO is to increase liquidity, get visibility and gain access to the investors for finance. However, direct listing aims to reach a wider audience of investors to sell their currently listed shares.

The expense related to the listing of shares 

A direct listing does not involve a lot of expenses as the company already has listed shares. Companies utilizing direct listing do not spend money on underwriters as they already have an established brand name. 

In the case of an IPO, the company is to be listed in the financial market for the first time. Therefore, the company has to be spent a significant amount of money to make the investors aware of the upcoming IPO. The company has to pay underwriters to get the word out about their shares and sell them at discounted prices to attract investors.

Time is taken to list the shares.

Listing shares in the financial market for the first time can take months as necessary approvals have to be obtained. To get these approvals, the company must fulfill various criteria and prepare documents, which can be difficult. Therefore, an IPO in the financial market can take several months. 

In the case of a direct listing, the company has already gone through the process of listing the shares. Therefore, the company does not have to get the same approvals again and can easily list its shares on another exchange.

Lock-in period of the shares

In the case of an IPO, the companies can introduce a lock-in period that restricts the existing shareholders from selling their shares as soon as the company goes public. This is done to prevent a large supply of shares in the market with the IPO, which could decrease the value of the stock.

There is no lock-in period in the case of direct listing. Since the company is listing its existing shares, the trade will occur only if the shareholders are ready to sell their shares.

Also read: How is the IPO price decided?

Final Words

A direct listing involves trading the company's existing shares, whereas an IPO is when the company creates new shares. Investors must understand these key differences while looking to invest in an IPO or Direct listing. The companies looking to list their shares in the financial market must also carefully examine these methods before deciding. 


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