EXPLAINED | How The Listing Price Of An IPO Is Decided
A company’s share price at the time of the IPO is determined by the valuation of the company, divided by the total number of shares at listing
New Delhi: The listing price of an IPO (initial public offering) is decided on the basis of demand and supply of shares that aims to strike a balance between the two. The listing price is arrived at is based on all the orders received for the shares and with the idea of maximising the number of trades that can be executed when the stock launches on the exchange. This process is called price discovery.
In simple terms, a company’s share price at the time of the IPO is determined by the valuation of the company, divided by the total number of shares at listing.
If the demand for the shares is higher than the number of shares offered, the issue is said to be oversubscribed, while the reverse is called undersubscription when the interest in the shares is insufficient. The shares are listed at a cut-off price premium, at par, or discount.
Year 2021 has been the best year so far for IPOs. So, before going deeper into the topic, we must know what exactly an IPO means.
What Is An IPO?
An initial public offering (IPO) is the process by which a privately-owned company is transformed into a public enterprise and it shares are traded on bourses. This process is also referred to as going public. After a private firm becomes a public company, it is owned by the shareholders who buy the stock of the company.
What Is Listing Price?
IPO listing price refers to the opening price of a share when a company makes a debut on the stock exchange. The listing takes place after the three-day IPO when investors subscribe for the shares. The allocation of shares takes place after the IPO. However, the listing price is different from the offer price, which is decided by the investment bank that is assisting the firm with the IPO.
Why The Market Is Witnessing An IPO Rush?
The IPO rush began at the end of 2020 because of increased stock market activity and the Covid-19 pandemic’s impact on businesses. The high availability of money in the market has given investors the muscle power to invest in newer companies and start-ups.
In the SME market segment, there were 11 companies which made their market debut on the bourses in July-September period. This represents an increase of 175 per cent as compared to the same quarter last year. In total, 72 IPOs hit the stock market during the January-September period this year in India. Some companies are in queue to be listed. So, the number of IPOs will go up.
Factors That Impact IPO Cost
Some key factors that affect the pricing of the shares for IPO which should be considered before the valuation of shares such as, the current cost of shares that are similar to the organisation in the industry, number of stocks being sold in an IPO, the financial performance of the said organisation over the past few years, demand from potential customers for the stocks being sold, trend in markets, and potential growth rate of the company.
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