Saturday, February 9, 2008

IPO planning-auction and Pricing

In today's world, it seems that almost any topic is open for debate. While I was gathering facts for this article, I was quite surprised to find some of the issues I thought were settled are actually still being openly discussed.

If you don't have accurate details regarding IPO planning-auction and Pricing, then you might make a bad choice on the subject. Don't let that happen: keep reading.

IPO, the abbreviation of Initial Public Offering is name given to the first offer for selling stock to the public done by a private company or corporation. Mostly, IPOs are issued by younger, smaller private companies who look for capital for expansion purposes. Large private companies can also issue IPOs in order to become publicly traded companies. In case of an Initial Public Offering, the company that issues IPOs may try and obtain the aid of an underwriting firm that acts as a helper in determining which type of security needs to be issued (if common or preferred), the time of IPO introduction in the market, and the best IPO offering price.

IPO purchasing is quite a risky type of investment. Those investors who fall in the group of individual investor, it becomes truly tough to predict what the stock will be resulting to on the initial trading day and in the future days. For this reason it requires brief historical data about the company for analysis purpose. In this page we will inform you about the role played by auction in IPOs. Keep scrolling to know more about IPO auction.

Bill Hambrecht, a venture capitalist tried to formulate that can reduce the traditional inefficient process of auction. According to the methods of the traditional IPO auction, the public sales of IPOs are made to the highest bidder. Bill Hambrecht prepared a way regarding the issue of IPO shares by a Dutch auction. This was just an attempt in order to minimize the heavy under-pricing mainly nurtured by underwriters. However, the investment banks mostly playing the role of the underwriters failed to adopt this Dutch auction strategy of IPOs effectively. Amongst the various companies using Dutch auction strategy of IPO, Google is one of the most established companies that became public by the use of auction. Right on the very first day of trading, Google’s share price rose upto 17% despite the use of the Dutch auction method.

Perception of IPOs is really a controversial issue. Those issuers and investors who view a successful IPO only as a means of making money as much as possible, the concept of IPO proved to be a complete failure to them. Those who consider a successful IPO from the perspective of the kind of investors that sooner or later made profit from under-pricing, the concept of IPO to them became a complete success. One should keep it in mind while going for an IPO auction that there are different sets of investors who bid in an auction. There are more institutional biddings, and very little individual bidding. The use of Internet in the IPO auction process is making the entire process quite easy and a fairer method of selling shares. This is the specialty of Dutch auction of IPO.

pricing of IPOs which is a very important aspect of issuing IPOs. The pricing of IPO should be made by the issuer in such a way that it goes along with the market prices of other companies IPOs, as well as the pricing should not be so much that it becomes a difficult task for investors to purchase the stock. Moreover, the IPO pricing must also bring profit to the issuing company. This is the reason why pricing of IPOs is an important issue from both the perspectives of the issuing company and the individual investors.

Apart from analyzing the best IPO introduction time in the market, and what type of security should the IPO cover, what will be the price of IPO is also very important. The IPOs should not be overpriced or under-priced.

Historically, both the US and global IPOs have been under-priced. The reason why underpricing of an IPO is done by the issuer is for generating additional interest among the investors in the stock when it becomes publicly traded for the first time. This sometime leads to significant gain in part of the investors who were distributed IPO shares at a certain offering price. Nevertheless, IPO underpricing effects in too much of pop and loss of value, that implies lost capital that might have been raised for the profit of the company or issuer if the stock had been issued and offered at a higher price to the buyers or investors. So, while deciding on the pricing of an IPO, care must be taken so as to avoid underpricing.

To escape the effects of underpricing, the issuers must also not implement overpricing of an IPO. The danger of overpricing of IPO is also of great consideration for companies issuing IPOs. If an IPO is issued in the market for public at a comparatively higher price than what should be paid by the market, the underwriters (mostly investment banks) may face troubles in meeting their commitments in selling the issuer’s shares. Even if the underwriters are able to sell all of the issued shares in the market, if a fall in value of the stock takes place on the first trading day, then it may result to the shares loss of marketability that further results in the loss of the value of an IPO.

The IPO issuing company appoints lead managers who help in deciding an appropriate price of issuing the shares or IPOs. There are two ways of determining the price of an IPO, they are: either the price of the IPO is decided through the book building process; or the price of the IPO is decided by the issuing company with the assistance of its lead managers.

That's the latest from the IPO planning-auction and Pricing authorities. Once you're familiar with these ideas, you'll be ready to move to the next level.

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