How is the IPO price determined
New issues: This is how the issue price is determined
After years of lull in new issues, business with newcomers picked up speed again in 2014. But how is the price actually set at which the new share will be listed on the stock exchange? There are two basic options for pricing:
In the so-called fixed price method, the parties involved - i.e. the issuer and the bank commissioned with the issue - calculate a fixed amount for which the share is offered to the public for purchase. The business situation and prospects of the company in question are included in the calculation, as are current trends on the stock market.
When setting prices, companies and banks are faced with the following dilemma: on the one hand, the raising of capital for the company should be optimized, on the other hand, the price per share must not be too high in order not to scare potential investors. Ultimately, the paper should also be attractive in comparison to values that have already been quoted.
The issuing bank is doing itself and the company a disservice if it first gets what it can get out of the market, but the paper loses its value significantly in the subsequent trading. Although the company would have its capital dry, the loss of image and the disappointment of investors could have negative long-term consequences for the company, which are also reflected in euros and cents.
Once the issue price has been set, it is clear: This is how much the interested party has to pay per share, regardless of how many shares he orders. The fixed price procedure is interesting for you as a private investor in that it provides calculable prices from the outset. For you this means: With the fixed price procedure, you know exactly where you are. You can rest assured that you will receive the subscribed shares for the specified amount - whether you will also receive the desired number of shares is another matter.
Book building process
The pricing is quite different in the internationally widespread bookbuilding process, which was first used in Germany last year. Here, the issue price and volume are determined on the basis of the incoming subscription orders and thus by the market. It is now very popular with issuing companies and banks.
The bookbuilding process ideally runs in three phases: The first phase is the “pre-marketing phase”: the consortium banks approach potential major investors in order to sound out the general interest and initial price expectations.
Then the “marketing phase” begins: the newcomer to the stock exchange is presented at important financial centers. At the same time, there will be “one-on-one meetings” (one-on-one discussions) with selected institutional investors. The information from both phases is evaluated and a price corridor around the analytically determined price is established. This price range will now be made public.
Now the actual “bookbuilding phase” begins: the syndicate banks accept buy orders from investors within this price range. Now it's your turn as a private investor.
The price, number and time of the order as well as some basic investor data such as nationality, industry, investment horizon (in the case of larger subscription volumes, also the name) are recorded on special order forms.
The consortium leader records all orders centrally in a book and is therefore also referred to as the "bookrunner". Now the price-volume function is determined and both the final issue price of the paper is determined and the issue volume is allocated.
If the pre-market offer meets with sufficient response, this drives the price - the future issue price is corrected upwards. For you this means: You have to reckon with issue prices that are ultimately determined by the interests of large investors.
Like the major investors, you can also limit your order, i.e. tie it to a certain asking price within the bandwidth issued.
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