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Methods of IPO





A Company is new but has a sound business model. Its products have great demand. Its services are selling like hot cakes. But the Company is facing a financial crunch. It needs more money for expansion. This is when the Company decides to go public. The Company sells its stock to the public for the first time called an IPO. The Company first targets people or institutions with a lot of money. These are called Qualified Institutional Buyers. There are a number of methods of IPO which you must learn.

What are Qualified Institutional Buyers?

These are the big guys… Mutual fund houses, Banks, pension funds, Insurers and even venture capital funds. At least 60% of the size of the issue needs to be subscribed (offered) to the Qualified Institutional Buyers if the price is decided by the book building method. The offer made to the Qualified Institutional Buyers is called a QIP (Qualified Institutional Placement).

What are the methods to price an IPO?

Fixed Price Method

You have the fixed price method where the price at which the Company offers its shares is fixed (decided), beforehand and the investor have to buy the shares at the decided price. QIB’s do not invest in fixed priced issues (shares which are offered at a fixed price) and as a result they have no interest in its pricing. This means there is no validation by the QIB’s and the IPO may be overpriced (priced too high) which means they would be very less investors.

Book Building Method

The method of price discovery (Finding the prices of the equity shares of the Company) is called book building. The optimum prices of the shares of the Company have to be fixed through a process known as book building. A price range known as a price band is decided by the Company. It has a lower limit and an upper limit .The lower price (The shares will not be offered at a price lower than this) is called the floor price. The upper price (The upper limit of the pricing of the shares) is called the ceiling price.Shares of the Company are offered within the price band.

You can bid only between the floor price and the ceiling price. The issue is then closed for subscription. The cut off price is then decided by the Company issuing the shares and the lead manager to the issue, based on the interest and the appetite of the investors to the equity (share) issue by the Company. All investors who have submitted bids at and above the cut off price, are able to procure the shares of the Company. If you are a retail investor, then you can also apply at the cut off price (you are ready to purchase at the price decided by the Company and the lead manager to the issue).

If you have applied at the ceiling price and the cut off price is less than the ceiling price then the excess money is refunded to your account. Learn methods of IPO and make money in the stock methods.

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