Advertisement
investing

How the Spotify IPO Broke the Rules

Look for other big companies to sell shares directly when they go public.

When Spotify announced an initial public offering in the spring, headlines focused less on the decision to go public than how the music-streaming giant chose to do it. Rather than hiring underwriters to bring the stock to market, Spotify listed its shares directly on the New York Stock Exchange. Other well-known companies mulling a public offering, such as Uber and Pinterest, may follow Spotify's example, says University of Florida finance professor Jay Ritter.

Typically, when a company wants to raise money by going public, it hires an underwriter–usually an investment bank–to drum up interest among investors. The underwriter sells shares to investors (usually large institutions rather than individual investors) at an offering price determined by the bank and the company.

Advertisement - Article continues below

By listing shares directly on an exchange, Spotify saved money in two ways, Ritter says. The firm avoided the fee paid to underwriters and sold shares directly at market price, rather than at an artificially low offering price set by the investment bank and issuing company.

Despite its unorthodox IPO, Spotify's shares didn't do anything out of the ordinary. The difference between the stock's first-day high of $169 and low of $148 was 14%, putting it in line with Twitter (14%) and Chinese e-commerce giant Alibaba (11%).

Recent successful IPOs by Spotify and data storage company Dropbox could encourage other private companies to go public in the next few months. If you're considering buying a stock following its IPO, examine the company's annual sales, which you can find in its S-1 filing with the Securities and Exchange Commission. In the three years following an IPO, companies with substantial sales significantly outperform those with little or no sales, says Ritter. Companies with less than $10 million in sales had an average three-year loss of 9.5%.

Advertisement
Advertisement

Most Popular

How To Buy a Roth IRA When You Make Too Much To Qualify For One
Roth IRAs

How To Buy a Roth IRA When You Make Too Much To Qualify For One

With their tax-free growth and tax-free withdrawals, Roth IRAs are a great deal — if you qualify. If you don’t, well, there’s still a way to get into …
September 23, 2020
Social Security Recipients, Veterans Must Act Now to Get Extra $500 Stimulus Check
Coronavirus and Your Money

Social Security Recipients, Veterans Must Act Now to Get Extra $500 Stimulus Check

The deadline for seniors and veterans to request an additional $500 stimulus check for a dependent child is approaching fast. See how you can claim yo…
September 25, 2020
High-Tech Aids for Aging in Place
Caregiving

High-Tech Aids for Aging in Place

Apple Watch and other technology provides fast feedback, comfort for older users, and a powerful assist for caregivers.
September 23, 2020

Recommended

Bonds: 10 Things You Need to Know
Investing for Income

Bonds: 10 Things You Need to Know

Bonds can be more complex than stocks, but it's not hard to become a knowledgeable fixed-income investor.
July 22, 2020
Best Bond Funds for Every Need
Investing for Income

Best Bond Funds for Every Need

In a changing market, it’s important to remember why we hold bonds in the first place.
September 15, 2020
Does a 40% Bond Allocation Make Sense in Today’s Portfolios?
retirement planning

Does a 40% Bond Allocation Make Sense in Today’s Portfolios?

For many investors, the short answer is no. Here’s why, and what you might consider instead.
September 7, 2020
Is the Stock Market Closed on Labor Day?
Markets

Is the Stock Market Closed on Labor Day?

The good news: Stock markets and bond markets alike get the day off for Labor Day. But traders don't get an early start to the weekend.
September 5, 2020