The offering price is the per share price of publicly issued securities set by an underwriter and at which the shares are available for purchase. Although the term is mostly used in the context of the issuance of shares, it is also applicable in the issuance of other securities, including bonds and structured instruments.
Since the initial public offering (IPO) is a method of capital raising, the offering price is one of the key determinants on how much money a company going through the IPO will be able to raise. Due to this reason, the primary goal of underwriters is to set up an IPO price large enough to raise a substantial amount of money for a company and low enough to attract interest among potential investors.
Offering Price in the IPO
The determination of the offering price is one of the key stages in the IPO. The IPO price is identified and set by the underwriters of participating in the offering. In small IPOs, the offering price can be determined by a bookrunner. A bookrunner is a main underwriting investment bank that leads and directs the offering of a company’s stock. However, in major IPOs, the offering price is set by a syndicate of underwriters that includes several investment banks.
Generally, an underwriter considers numerous factors that can influence the IPO price. For example, an underwriter assesses the current value of a company, as well as its future perspectives. In addition, the IPO price also incorporates the risk overview of the investment and compensates investors for such risk. Finally, the IPO price considers the prevailing supply and demand forces.
At the same time, an underwriter balances the IPO price in a way that is high enough to raise sufficient capital for a company while low enough to stimulate the interest of potential investors to purchase the shares. Maintaining the balance is critical to ensure the execution of a successful IPO.
For example, if an underwriter decides to set a very low offering price, a company will not be able to raise significant capital. Conversely, a high offering price may discourage potential investors from acquiring the issued shares.
Offering Price vs. Opening Price
The offering price and the opening price are two concepts that are extensively mentioned in relation to IPOs but are frequently confused. However, the two terms are distinct from each other.
Essentially, the offering price is the price at which the securities issued in the IPO and can be acquired prior to the start of the actual trading of securities on exchanges. Generally, only institutional and accredited investors are able to purchase newly issued shares at the IPO price.
On the other hand, the opening price is the price at which the newly issued securities start trading on an exchange on the first trading day. Unlike the IPO price, which is set up by the underwriter, the opening price is determined by the supply and demand forces prevalent in the market.
CFI is the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful: