Ask the Fool Direct Listings

Q

What does it mean if a company goes public via a direct listing? — B.N., Madison, Indiana

A

Think of a traditional IPO — the initial public offering by which most companies “go public,” issuing new shares to trade on the public markets for the first time. The process typically involves companies hiring investment banks as underwriters to manage the process — including determining an appropriate valuation for the company and stock price. For that, underwriters have often received as much as 7% of the gross IPO proceeds.

With a direct listing, companies bypass underwriting intermediaries and sell existing shares (such as those owned by employees) to the public, saving money.

***

Q

What’s so bad about buying a stock at, say, $30 instead of $20, if you’re sure it’s heading to $60 in 10 years? — C.D., Walnut Creek, California

A

It’s all in the math. Imagine Holy Karaoke Inc. (ticker: HYMNS) is trading at $30, and you expect it to reach $60 in a decade. That would be a 100% gain in 10 years, equal to an average annual gain of about 7.2%. But if you bought it at $20 and it hit $60 in 10 years, that would be a tripling — a gain of 200% (around 11.6% per year, annualized).

Considering that the overall stock market has gained around 10% annually over very long periods, you can see that an annual gain of 7% is less attractive than an 11% one. Still, there’s a case to be made that getting into a terrific stock at $30 instead of $20 is OK — especially if you hope to hold it for many years. In general, though, the price you pay for a stock matters.

Want more information about stocks? Send us an email to foolnews@fool.com.