Music streaming giant, Spotify(SPOT), went public yesterday on the New York Stock Exchange in a highly unusual way. Here's what you need to know, in an easy to understand way:
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What's an IPO?
If you're not an avid investor, you're probably still familiar with the acronym, IPO, after Leonardo DiCaprio famously debuted the Steve Madden IPO in the movie, The Wolf Of Wall Street. An Initial Public Offering(IPO), is the process where a privately owned company becomes a publicly traded company by issuing new shares to outside investors. The key word here is “new shares”. Spotify however, is not issuing any new shares, thus not directly raising any new capital for the streaming platform. The approach is referred to as a Direct Listing.
How does an IPO work?
In a traditional IPO, a company hires a bank to arrange the initial public offering. The banks job is to find an agreed upon initial price for the shares, solicit investors, and even invest their own money to drive up the price of the initial shares. Companies typically conduct a roadshow to meet with investors prior to the debut. These are some of the reasons that so many popular IPOs such as Snapchat, Twitter, and recently, Dropbox, see tremendous gains on their first day.
Lets take a look at DropBox's recent IPO for example:
Dropbox debuted on March 23 at $21 a share and quickly gained over 40% due to the influx of capital from initial investors/banks. However, by the time the general public could get their hands on shares of Dropbox, it had already risen to $29 a share. IPO days are typically a great way for the rich to make more money, not the average joe.
How did Spotify's IPO go?
Spotify debuted on April 3rd at $165.90 a share, a significant increase from the initial reference price of $132 share. However, it has dropped to around $140 a share in a day. Volatility like this is normal with a new public listing. It will be up to individual investors going forward if they think Spotify will grow and become a profitable company.
So what does this mean for listeners and artists?
Don't expect to see any major changes in the near future. In the long term however, if Spotify can attract more investors, it will help against competition platforms such as Apple Music. If the untraditional approach works for Spotify, it could also set an example for future Wall Street listings.