Spotify non-IPO: What to know about the unusual listing and investing in your favorite companies

ByJames Dennin

Swedish streaming giant Spotify will make its stock market debut Tuesday, but even seasoned market watchers are unsure of what to expect. Spotify has ditched the typical corporate playbook for going public by pursuing what’s called a “direct listing,” in which the company’s private investors start selling their shares to the public without the help of bankers setting the price.

As a result of its unconventional listing process, it’s still unclear what the share price will be or when you’ll be able to buy it, according to the Wall Street Journal. To kick things off, the New York Stock Exchange will set a so-called “reference price” sometime early Tuesday. That “placeholder figure” helps trading systems tally future percent changes, and it will likely be several more hours until the stock starts trading in earnest under the ticker symbol SPOT. In the past few days, private markets shares have reportedly changed hands for as much as $137.50 a pop.

Reasons for the possibly risky move? Spotify’s direct listing will save it some money on banking fees, which can run in the high tens of millions of dollars for such a large tech company. The company’s executives have also said they’re pursuing a direct listing because they don’t need more cash. That’s usually the main reason a company goes public in the first place, by selling shares of stock to raise cash to re-invest in the business.

Spotify will likely be one of the most anticipated market debuts of the year. Jack Randall, a spokesman for the stock trading app Robinhood, said in an email interview that ever since the date for Spotify’s non-initial public offering was reported, about 14,000 of the app’s users have been searching for price information each day — about double the number of investors who, in the same time frame, looked for information about Dropbox in the run-up to its IPO in March.

Jenny Kane/AP

Spotify’s unconventional first day may be reason enough for cautious investors to stay on the sidelines. Investing in newer, untested companies is already more of a risk than investing in established names — as shareholders who bought Snap Inc. stock more than a year ago, or those who invested in the more recent Blue Apron IPO, have surely learned.

Spotify is still operating at a loss, and unlike Netflix — which owns or licenses its content — Spotify pays a royalty every single time a song is played, meaning its costs may continue growing as the company expands. Investors point to the company’s ability to generate cash, its large number of paying subscribers and pre-eminence among big music streamers as a sign it will eventually become profitable.

Should you buy stock to invest in your favorite companies?

Even if you’re convinced of Spotify’s potential, everyday investors have a major competitive disadvantage when it comes to buying stock. As Mic previously reported, even professional stock pickers have a difficult time “beating the market.” Pros trade stocks all day long and benefit from better information than you: According to Business Insider, J.P. Morgan spent about $9 billion in 2016 on technology services like the Bloomberg Terminal to help employees obtain market and company data before it’s made publicly available.

That said, there are always exceptions. Investing in the industry in which you work, for example, may give you insight into your industry’s likely winners and losers, which can help guide how you invest. The company you work for may also issue stock to its employees at a discount or insider price. But insider prices don’t always guarantee big payouts, as seen in this Los Angeles Times story about disgruntled tech employees who sold their stock too early.

One of the strongest cases for investing in companies you know well may be more educational than financial. That’s because while most of the information investors use can be pretty confusing, it also follows a standardized format.

When a company sells stock for the first time, it issues what’s called a prospectus outlining financials and other details of the business. And once they go public, a “vast majority of listed companies” host “earnings calls” at regular intervals to discuss financial results with analysts, investors and the media.

These key events are much easier to follow if you already know the industry jargon. Learning to make sense of them will help you better understand what might be driving inevitable market freak-outs or what companies are actually included in the funds recommended by your company’s 401(k).

Richard Drew/AP

The case for keeping your keeping your passions separate from your investments

On the flip side, investing in your own industry increases your risk of putting all your eggs in one basket, so to speak. Let’s say you go to work for Spotify, for instance, and spend all your spare money on buying up the discounted stock made available to employees. If you’re wrong, you’re not only out of your investment, you could also be out of a job.

It’s an extreme example, but it still helps demonstrate why diversification is one of investing’s golden rules. It’s why many experts — including the legendary Warren Buffett — recommend that most everyday investors stick to large batches of stocks through vessels like low-cost index funds, which carry fees but also provide you with access to hundreds of stocks, often for a minimum investment of around $100 or even less.

The logic is that since no one knows what’s going to happen in the future, it’s better to devise an investment strategy around what you can control: the fees you’re paying, the tax benefits you’re taking, or the free money available to you through an employer match.

But if you’re truly interested in learning how the markets work — as opposed to simply making a quick buck — there is a case to be made for investing in companies that actually get you excited. Whether you’re right or wrong, at the very least you’ll learn some valuable lessons that can inform how you invest more wisely in the future.

Sign up for the Payoff — your weekly crash course on how to live your best financial life.