Issue price explained
You often hear about companies ‘going public’ or launching an IPO. But what is an IPO? The full form of an IPO is Initial Public Offering. It is when a company sells its shares to the general public for the first time. Think of it like a small company growing and needing more money. Selling company shares to the general public helps it raise the required money.
However, when a company launches its IPO, certain terms are included. Two of the most important ones are the issue price and the floor price.
This article will help you understand what are issue price and floor price, in detail.
Also read: Right issues
Issue price meaning
The issue price is the amount you actually pay for a company's shares when they first become available to the general public. It is akin to the official starting price for these shares. This price is decided after careful consideration of the company's potential and market conditions.
Think of selling an old, personal item that you may believe is expensive, but the actual price depends on what someone is willing to pay for it. Similarly, the company knows its value, but the issue price shows how much investors are willing to pay.
Floor price meaning
The floor price is the lowest price investors can bid for shares during an IPO. It is like the starting point for bidding. However, the company doesn't decide this price alone.
A process called book building helps decide the final issue price. Here, the company announces a price range, with the floor price being the lowest and the cap price being the highest.
Investors then make bids within this range. The floor price sets the lowest acceptable offer, but the final issue price usually exceeds the floor price, depending on how much investors want the shares.
Also read: Volume-weighted average price
Understanding issue price and floor price
Now that you know the floor price and issue price meaning, let us take a look at how they work together during an IPO.
Let us consider an example. A popular athletic shoe company, ‘XYZ,’ is going public (IPO). This means it is selling its company shares to the public for the first time.
The company needs to decide a fair price for its shares. It considers factors like production costs, brand value, and future growth potential. Based on this, it establishes a price band, a range it believes its shares are worth.
- Floor price: This is the minimum price XYZ is willing to accept for each share. Think of it as the safety net to ensure it gets back some of its investment.
- Issue price: This is the final price at which shares are actually sold to investors.
The company announces its IPO with a price band, say, Rs. 100 to Rs. 120 per share.
- High demand: If there is a lot of excitement for XYZ’s shoes and future potential, investors might be willing to pay more. Bids from investors could push closer to the Rs. 120 mark (cap price) to secure shares.
- Low demand: If there is less interest, investors might only offer prices closer to the Rs. 100 floor price.
After considering all this, the company wants a price that reflects its value while attracting enough investors. Based on the price band, investor bids, and overall company analysis, the final issue price will be between Rs. 100 and Rs. 120.
What is a book-built IPO’s price band?
When a company decides to go public and sell its shares for the first time, it often uses a process called book building to determine the price range at which it will sell these shares. This range is what we call the price band.
First, there's the floor price, which is the minimum amount investors can bid for a share. Then, there's the cap price, which is the highest price that investors can bid for the shares, acting as a limit to prevent bids from going too high.
Now, imagine the space between the floor and cap price as a field where investors play their bidding game. This is what we refer to as the price band.
Also read: Price-to-book ratio
What is the difference between the issue and the listing price?
The issue price and the listing price can be different. Why? Let us break it down.
Once the company's shares are on the stock exchange, their price can go up or down based on how many people want to buy them (demand) and how many shares are available to buy (supply). If many people want to buy the shares, the listing price might be higher than the issue price. However, if only a few people are interested, the listing price could be lower than the issue price.
Also, you need to consider the overall market. In a good market, where lots of people are buying stocks, the listing price might be higher than the issue price based on the higher demand.
In simpler terms, the issue price definition is the share price the company decides for each share during the IPO process. The listing price is the price at which investors can buy the shares listed on the stock exchanges.
Conclusion
Knowing the difference between the issue and listing prices is important for potential IPO investors. A company's issue price serves as its starting point for investment, while its listing price reflects the market's response. Understanding these prices and other company fundamentals and market conditions can help you make informed decisions about participating in an IPO.
