Underpricing
Underpricing is the practice of listing an initial public offering (IPO) at a price below its real value in the stock market. When a new stock closes its first day of trading above the set IPO price, the stock is considered to have been underpriced.Underpricing is short-lived because investor demand will drive the price upwards to its market value.
Underpricing
Definition
Underpricing refers to the practice of setting the initial public offering (IPO) price of a stock below its true market value. When a new stock's closing price on the first day of trading is higher than the set IPO price, the stock is considered underpriced. Underpricing is temporary, as investor demand will drive the price up to its market value.
Origin
The phenomenon of underpricing can be traced back to the early stages of the stock market. As the IPO market developed, investment banks and underwriters often priced new stocks conservatively to ensure successful issuance and attract investors. This conservative pricing strategy led to the occurrence of underpricing.
Categories and Characteristics
Underpricing can be categorized into the following types:
- Systematic Underpricing: This is a widespread phenomenon caused by inherent flaws in market mechanisms and pricing models.
- Non-systematic Underpricing: This is due to specific circumstances of a company or industry, such as lower market expectations for the company's prospects.
Characteristics include:
- Rapid price increase in the short term.
- High investor demand for new stocks.
- The company may miss the opportunity to raise more funds.
Specific Cases
Case 1: Alibaba Group
When Alibaba went public in 2014, the IPO price was set at $68, but the stock closed at $93.89 on the first day, a 38% increase. This indicates that Alibaba's IPO was underpriced, and market demand for its stock far exceeded expectations.
Case 2: Facebook
When Facebook went public in 2012, the IPO price was set at $38, and the stock closed at $38.23 on the first day, showing almost no increase. This indicates that Facebook's IPO pricing was relatively accurate, with no significant underpricing.
Common Questions
Why does underpricing occur?
The main reasons include conservative pricing strategies by underwriters, insufficient market demand expectations for new stocks, and limitations of pricing models.
What impact does underpricing have on a company?
The company may miss the opportunity to raise more funds, but it also ensures the successful issuance of the IPO, reducing the risk of issuance failure.
