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How Does an IPO Get Priced?

Personal Finance

What is an Initial Public Offering (IPO)?

An IPO, or initial public offering is a process by which a private company goes public by selling its stock through the issuing of shares to the general public. It can be a new, young company or an old company. They can go public by getting listed on the NSE (National Stock Exchange of India). Whenever new IPOs come onto the market, the issuer hires an investment bank. It trades the shares on an open market.

The company that offers the share is an “issuer.” They can raise equity capital in two ways. One method is to sell its stock to the public. But, the issuer is not obligated to pay back capital to public investors. Another is when shareholders sell their shares to the public without raising any fresh capital. The method by which an analyst ascertains the fair value of a company’s shares is known as an IPO valuation.

Why does a company enter into an IPO?

The private company launches an initial public offering for two main reasons:

1) To raise money for growth

2) To cover debts or losses.

Why does an investor need to know about IPO valuation?

Knowing the Initial Public Offerings valuation process is essential for investors for two reasons:

  1. It tells you about the company’s business prospects and potential for future growth.
  2. Examine the financial, income, and cash flow records of a company. Through this, you may easily understand if a company’s stock has strong investor interest.

How does a public investor determine if the pricing is right?

As an investor, investing in a new company that has not been listed on an exchange before is challenging. But smart public investors try to understand and analyse the issuer by looking at their registration documents and financials. The financials give you an idea of how fair the prices of IPOs are. Read on to know what factors are responsible for determining the price of the Initial Public Offerings.

How Does An IPO Get Priced?

Listed below are the factors that determine the pricing of an IPO:

1. Demand

Demand and supply govern IPO prices. The higher the demand for the shares of the company, the higher the price will be. A company’s value may not always increase if its shares are in high demand. The company will, however, be valued at a greater level.

Due to the timing of the IPO and market demand, two identical companies may have different IPO prices. A firm will only conduct an IPO if it believes its stock has strong investor interest.

2. Industry comparisons

Comparing different companies listed on the exchanges is important in determining IPO pricing. As new IPOs arrive, they are listed on the exchange. Smart investors compare a company’s IPO pricing with that of its already listed competitors.

They can decide not to invest in the IPO if they think it is overpriced and too different from its competitors. If the price is the same as that of competitors, they believe the price is reasonable and thus make an investment.

3. Growth prospects

The growth prospects of the issuer play a crucial role in determining the price of an Initial Public Offering. Companies raise capital to fulfil the company’s ambitions and fuel their growth. But if the company’s primary purpose is to recover its debts and losses, the IPO pricing will be quite low. Investors prefer investing in a company with a solid growth story. They will see whether it will expand in the future. The company that showcases its growth has a higher chance of gaining investors.

4. Industry narratives

Not all factors determining the IPO price are measurable in numbers. Some factors, like the industry narrative, are beyond that. A company’s story is as important as its revenue projections. A valuation procedure evaluates a company’s potential to transform an industry. And if it is at the forefront of a new business model by producing novel goods or services. For instance, the COVID-19 pandemic renewed interest in the pharmaceutical industry. When a pharmaceutical business launches its IPO, this can raise its valuation.

Upcoming IPOs 2022.

Now that you know how an IPO is priced, you must be wondering about the upcoming IPOs in 2022 to invest in. Here are the upcoming IPOs in 2022:

Go Digit. To be announced.
Go Air.To be announced.
Bajaj Energy. To be announced.
OYO.To be announced.
KFin Tech.To be announced.
Emcure Pharmaceuticals. To be announced.

To sum up,

IPOs are significant stock market events for a reason. You have a chance to make good profits over the long term by investing in the right business. Check the list of upcoming IPOs in 2022. The challenge, though, is to separate the top achievers from the others.

Before buying shares, you must compare its IPO prices with those of its competitors. This gives an idea of whether the pricing is appropriate. Besides, always know a company’s growth story, which indicates if it will expand in the future. Visit our website to find more useful and informative blogs.