[notyourwork]

So basically the IPO is a way to formalize the initial price of the stock. By bypassing that process, they will sell for whatever the market dictates for better or worse, is that correct?

If this is the case, is it possible the market could drive the price way up or way down (more volatile?)

Additionally, is it possible that all private share holders could prior to first day of listing come to an agreement on a minimum price they would sell for? This would essentially be them setting their own price. Now whether people are willing to pay at that price is another story.

[sigstoat]

> So basically the IPO is a way to formalize the initial price of the stock.

no. it is the company selling their stock to the public for the first time, to raise cash. the company chooses a price it is willing to sell at.

further, "formalizing" the price of the stock isn't a thing. the price of the stock is whatever somebody will sell it to you for.

> By bypassing that process, they will sell for whatever the market dictates for better or worse, is that correct?

once the stock is on the market, it sells for whatever someone will buy it. the IPO happens shortly before it hits the market.

> Additionally, is it possible that all private share holders could prior to first day of listing come to an agreement on a minimum price they would sell for?

sure, they could. but there are probably already hundreds or thousands of them.

[adventured]

> no. it is the company selling their stock to the public for the first time, to raise cash.

That's incorrect. The company is not raising cash with this IPO. The insiders are doing the IPO to sell, which should tell you what's actually going on. By direct listing, they avoid the traditional lock-up, so they can liquidate immediately.

[sigstoat]

> The company is not raising cash with this IPO.

...there isn't an IPO, which is the whole point of the article, and these comment threads.

i think in the context of the comment i was replying to, it was fairly clear i was explaining what an IPO is normally for.

[tempestn]

The comment you're replying to is describing a regular IPO, and is not incorrect. The direct listing process is not a type of IPO; it's skipping the IPO.

[sdkmvx]

Well the IPO price is the price at which the company sold new stock to the public. Then the price moves however the market causes the price to move. They're not going to sell new stock to the public, but the price will move however the market causes it to move.

The market works because there are always people willing to take both sides simultaneously. To some extent this is driven by people who have different opinions. This is also drive by people working on different time frames. Somebody who thinks it will rise in the next 10 years may buy from somebody who thinks it will fall in the next 10 minutes.

When there are not hoards of people willing to take both sides, price starts to move around erratically. Ultimately Spotify isn't very widely held. I doubt any of the current holders are interested in trading frequently. They want to make their trade and get out. So who is selling on the first few days? Market makers will work both sides of the market as they always do, but they won't hold a large short position against a rising market. Instead the spread will be large. That's why I suspect we'll see some wild price swings before the market settles down.

On the other hand, you could say this about any IPO. And it's true that the first few days are often rocky. It remains to be seen if Spotify's plan produces a more rocky start than is usual.

They certainly could (subject to market manipulation laws). Would it work? Probably not. There will be sellers willing to sell short naked (intending to buy back by the end of the day so they don't have to deliver non-existent stock). I'm sure there's many holders, since Spotify has been around for a while and presumably has some sort of stock compensation program. Will they all refrain from selling? No, because somebody wants to renovate his kitchen.

[notyourday]

> So basically the IPO is a way to formalize the initial price of the stock. By bypassing that process, they will sell for whatever the market dictates for better or worse, is that correct?

No, IPO is the placement of the shares from whoever has them before the IPO position ( underwriter or the company itself ) to the accounts of those who want to have those shares the moment before the new issue is listed on an exchange.

Buying at the open is not buying at the IPO.

Company X selling shared to underwriters at $7/share is not an IPO.

Underwriter pricing shares that it bought from the company for $7/share at $11/share and delivering those shares to the Suzy Investor who wanted to buy that company before the shares open is the IPO.

Suzy Investor selling shares at $11.05 which is the national best bid the second after the stock opened to John Q. who did not get the shares from the underwriter is NOT the IPO.

[joshjkim]

per earlier comment, yes, way more volatile because supply/demand will be less managed - as you say, IPO sets price, and this is done when bankers effectively pre-negotiate price and placement amounts with many institutional investors (mutual funds, public pensions, other large alternative asset managers etc.) - this is happening throughout informally (though very informally, since they can't offer the security until SEC registration is complete), but really gets down to details during the IPO roadshow, where the final deal is present and the bankers finalize the allocations to various institutional investors, which is what they use to set the opening day of trading price.

IPOs also require lockups of pre-IPO investors, and the ideal situation is always to have a large number of new well-respected investors take relatively large blocks that they are likely to hold for a long-ish period of time and pre-IPO investors locked up for a at least 6 months, which will introduce some protection against volatility and the stock price going below the IPO price. obviously price can still go haywire, but it's the best a company can hope for in the public market.

[joshjkim]

PS - if you want to know more about IPO road, here's a decent summary: http://www.investopedia.com/articles/investing/020916/inside...

if you want to dig really deep (like, 284 pages deep), this lays it all out: https://www.wsgr.com/publications/PDFSearch/IPO-guidebook-3....