Book Building
Book building is the process by which an underwriter attempts to determine the price at which an initial public offering (IPO) will be offered. An underwriter, normally an investment bank, builds a book by inviting institutional investors (such as fund managers and others) to submit bids for the number of shares and the price(s) they would be willing to pay for them.
IPO Pricing
Definition
IPO pricing refers to the process by which underwriters attempt to determine the price of an initial public offering (IPO). The underwriters, usually an investment bank, invite institutional investors (such as fund managers and other investors) to submit the quantity and price at which they are willing to purchase the stock, thereby creating a book of demand.
Origin
The concept of IPO pricing originated in the early 20th century when stock markets began to mature, and companies started raising funds through public stock offerings. Over time, the process of IPO pricing has become more complex and systematic, especially in the late 20th and early 21st centuries, with the rapid development of global financial markets.
Categories and Characteristics
IPO pricing mainly falls into two categories: fixed price offering and book building. In a fixed price offering, the underwriter and the issuer pre-determine a fixed issue price and then sell the stock to investors. In book building, the underwriter collects demand information from investors through a bidding process and then determines the issue price based on this information.
The fixed price offering is characterized by high price certainty but may not fully reflect market demand. Book building, on the other hand, can better reflect market demand but comes with higher price uncertainty.
Specific Cases
Case 1: A tech company plans to go public and the underwriter chooses the book building method. The underwriter invites several institutional investors to participate in the bidding process. Based on the demand and bids from these investors, the final issue price is set at $20 per share, and the company successfully raises $200 million.
Case 2: A traditional manufacturing company opts for a fixed price offering for its IPO. The underwriter and the issuer pre-determine the issue price at $15 per share and publicly offer the stock. Due to high market demand, the stock price surges on the first day of trading, providing significant returns to investors.
Common Questions
1. Why choose book building over fixed price offering?
Book building can better reflect market demand and help the issuer determine a more reasonable issue price.
2. What are the risks involved in the IPO pricing process?
The main risks include market demand uncertainty, price volatility, and the underwriter's pricing ability.
