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Wednesday, March 20, 2019 5:54:22 PM
"After the IPO is approved by the SEC, the effective date is decided. On the day before the effective date, the issuing company and the underwriter decide the offer price (i.e. the price at which the shares will be sold by the issuing company) and the precise number of shares to be sold. Deciding the offer price is important because it is the price at which the issuing company raises capital for itself. However, after the stock starts trading on the secondary market, money raised through the sale of shares the company, not the underwriter. The following factors affect the offering price:
the success/failure of the road shows (as recorded in the order books)
the company’s goal
condition of the market economy
IPOs are often underpriced to ensure that the issue is fully subscribed/ oversubscribed by the public investors, even if it results in the issuing company not receiving the full value of its shares.
If an IPO is underpriced, the investors of the IPO expect a rise in the price of the shares on the offer day. This increases the demand for the issue. Furthermore, underpricing compensates investors for the risk that they take by investing in the IPO. An offer which is oversubscribed 2 to 3 times is considered to be a “good IPO”.
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