How the Listing Price of IPO is Determined
There has been a lot of buzz in the stock market about IPOs as many IPOs came in the year 2021 and gave extraordinary returns to their shareholders.
Also, people take much interest in IPOs as they find them as a major investment product and provide new hopes to the people.
In other words, investors find new investment hope in these IPOs and as a result of this, the IPO of Zomato, which opened on July 14, was subscribed 1.05 times on the first day of its launching.
The retail investors subscribed to the Zomato IPO almost 2.69 times which is a history in itself. If we talk about the non-institutional investors, then they have put in bids of 13 per cent against the reservation which is a difficult thing to forget in the history of SME-IPOs.
Here, an important question often comes to the investor’s mind: How did the listing price of an IPO decide?
Before getting a dig deep into the whole scenario, let’s take a sneak peek at the listing price:
What is the Listing Price?
When a private limited company wants to become public for the very first time, it needs to get its stock listed on the major stock exchanges. To complete a process, the company is required to decide the opening price of shares which is known as the listing price.
The launching period of IPO is of three days and post that the investors are allowed to purchase the shares at a given price. Here, the listing comes into place.
Please note that the allocation of shares takes place only after IPO launching.
The listing price is different from the offer price and is decided majorly by the investment bank which is assisting the company during the IPO launching process.
After the successful launching of an IPO on the stock exchange, it becomes available for every shareholder to trade in the stock market.
Now, the shareholders can be actively involved in buying and selling shares in the secondary market.
How Is The Listing Price Determined?
Several factors will impact how the good IPO gets listed on the stock exchange and how does it affect the IPO listing price:
Demand for a share makes a huge impact on the listing price of an IPO. Hence, the listing price of an IPO is also affected by the market demand of the company as the higher the demand, the higher will be the listing price.
The demand for the SME-IPO is affected by numerous factors including the potentiality of a company, its expected valuation, growth sector and more.
Let’s understand the listing process with a suitable example:
If the demand for an IPO is higher, then the chance of that IPO getting oversubscribed more, which in turn makes few of many get a chance to subscribe to it. If it is oversubscribed, many investors will get deprived of the IPO allotment process, and hence the demand surge.
The rising demand makes the IPO firm increase its listing price and hence more investors will trade it in the stock market.
Hence, a high demand, low availability of shares can result in great listing prices and hence great listing gains or vice-versa.
2. Growth Prospects of the Company
The listing price of an IPO is also affected by the growth prospects of a company. For instance, a company that wants to launch its IPO often comes with several objectives like paying debts, operational costs, which also plays a major role in the listing prices.
If a company comes with the objectives of growing and expanding its businesses, the majority of the retail investors will look forward to the same.
This will increase the orders, which in turn increase the demand of the IPO which eventually increases its listing price. The company is likely to list at a good price if there are any chances for good growth.
3. Grey Market Premium
A grey market is a place that is considered under regulated but often gets highlighted when it comes to a demand for IPO. It is the extra amount investors pay along with the offer price.
For example: if the offer price of an IPO is Rs 150 and its GMP is Rs 50. This indicated that the investor is willing to pay Rs 200 for the same IPO in the grey market.
4. The OFS (Offer for Sale) Value
An offer to sell an IPO indicates the number of shares that existing investors are willing to dilute in the IPO.
If OFS is more than a fresh issue, it certainly means that there is a reason why current investors no longer want to be part of the company.
This can be a turn-off for some investors. However, this is not always the case. If a company has high growth potential, it can prosper.
However, a large OFS value can adversely affect the list price.
5. Market Sentiments
Retail investors play a crucial role in deciding the IPO listing price. As more retailers are looking for an IPO, it further results in deciding the listing price.
A comparative analysis of the stock market analysts can also affect the market sentiments to a greater extent. If the investors are looking interested in a particular IPO and the market sentiments are positive, it is a good indication.
However, if there is a lack of interest of the retail investors, there are higher chances that the IPO listing price is considered low.
These are various factors that have a significant impact on the listing price of an IPO.
Therefore, always keep these factors in mind if you don’t know how to choose an IPO.
Good IPO listings are those which can give you attractive profits and also help you to increase the visibility of the company.
As stated above, numerous factors help promoters find the listing price of the company which includes investors’ interest, GMP, company valuation and most importantly the demand and supply of an IPO.