How IPO Listing Price is Decided?

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As exciting as it sounds, an IPO is just another way of filling up the pockets. But here the profit is defined by the listing price. So, let’s have a quick look at how IPO listing price is decided?

No doubt the high listing price gives investors an opportunity to earn better returns in a short time period.

But before investing, let’s have a look at some of the important aspects that help in defining the listing price and hence gains from the IPO.

What is the IPO Listing Price?

Listing price is the launch price of the share of an IPO when it initially enters the stock market or as we can also say in the secondary market.

Let us understand this with the help of an example,

Raju was a new vegetable vendor. He cultivated vegetables on his own land. To sell those vegetables, he first bought the cart and decided on a price range.

Now, this price range is known as the listing price of the IPO.

But wait!

How is he able to decide this price range?

Well! that depends on certain factors like:

The area where he is going to sell the vegetables.
The demand for the vegetable
Supply of the vegetable
The freshness of the vegetable, etc.

Similar to the above factors, one needs to check certain parameters in the stock market, that further help the exchange to decide the listing price of the stock.

Now as we move forward, do you know who decided the IPO listing price, the company, or the accompanying bank?

How Listing Price is Decided After IPO?

Ending your wait, it’s the issuer team that actually keeps an eye on the listing price of the IPO. There are certain factors that help this team in deciding the IPO listing price.

Further, as curiosity rises, let’s try to know what factors actually determine the IPO listing price. Here we’ll talk about;

Demand
Supply
Current Market Condition
Investor’s sentiments
Global factors
Promotors’ holding dilution via OFS
IPO GMP

Check details of Nykaa IPO GMP to know whether or not the IPO is worthy enough and to evaluate the listing gains.

Demand

Going to the example of the vegetable vendor, now let’s suppose that there are not many vendors in the area, hence it would create more demand and hence higher prices.

Right?

Similar in the case of the stocks, where the listing price is decided on the basis of demand of the share in the market.

For let’s say, for the last one year, the pharma companies are showing positive growth. Now if in this condition, if any Pharma company comes up with the IPO, then there is a higher chance of a high listing price.

Well! this is one of the factors, the high demand can be due to many reasons like good company background, imperative future goals, etc.

Thus, high demand leads to over-subscription of the IPO which eventually leads to the high listing price.

Supply

With demand, we always hear the word supply.

Now let’s suppose, that there are many vegetable vendors in the area and the new vendor came in.

Do you think that he would be able to sell the vegetable at a higher price?

In fact! to be competitive he has to set a reasonable discount and less price range to grab more customers.

Relating the situation with the IPO listing price, here the supply of shares is considered before finalizing the price.

For let’s say, recently Zomato IPO was opened with only a 10% subscription for retail investors. But being in demand among investors, it opens at the listing gain of 65% listing gain which is almost double of what was expected.

IPO Grey Market Premium

What else can you think affects the IPO listing price.

Well! it’s demand in the Grey Market.

Let’s make it easy.

Now many times we heard about the black marketing of vegetables (let’s say onion). There the vendors generally bid at a higher price to purchase onion due to expected growing demand.

Now higher its value in the black market, the higher is the chance that it would be available to the general public at a high price.

In IPO, before getting listed in the stock exchange, the keen investor starts bidding their own price in the Grey Market.

This price becomes one of the major parameters to how IPO listing price is decided.

Current Market Condition

As it is generally observed in India, that during the wedding season, the demand and hence price of vegetables increases.

Similar is the situation in the stock market. To get a clear idea, as we saw during COVID, the entire market was bearish.

Understanding the NIFTY and SENSEX trends shows the market condition whether there is enough capital in the market or not?

The same goes for the sector as well.

When we talk with regard to individual sectors, the performance of the sector also matters when a company decides to list itself for an IPO.

For example, currently, the pharma sector is highly progressing, any organization for the same listing itself for IPO will definitely have a positive impact on the same.

Investor’s Sentiments

How would you react if someone asks you to buy off-season fruit say watermelon in the month of December?

Of course, there would be negligible people willing to buy it. Right?

So what do you interpret from this?

A downfall in the price of the fruit.

Thus, investor sentiments play a major role in IPO pricing especially in the case of underwriters.

It is said that when pre-IPO investor sentiment is high, the underwriter’s judgments before bidding will be high or as we can say, will increase. When this happens, the listing price takes a dip in general.

Hence you see, investors’ sentiments and interests impact hugely on the IPO pricing in the pre-IPO session along with the listing price.

Global Conditions

Last but not the least, the global condition has a huge impact on the listing price of the IPO.

If the import of certain vegetables is reduced due to the global tension or the condition like Covid-19 then the chance is higher than the price of that particular vegetable will increase.

The different global conditions and interests of Foreign Institutional Investors in the Indian stock market defines the price of the share on listing in the stock market.

IPO Vs OFS

There is a bit of a difference between whether the IPO is an offering for retail investors so that the company can spend towards growth or it is an Offer for sale where the existing shareholders are looking for dilution.

If it is the former, then yes, there is a potential opportunity for investment (depending on the factors mentioned above). However, for the latter case, the reasons for dilution or exit of current investors need to be known.

Thus, make sure you are aware of the exact details before putting your hard-earned capital into any random offering out there.

Who Decides IPO Listing Price?

When the shares get listed in the stock exchange, the whole control is in the hand of the stock exchanges.

But the stock entering the secondary market, have you ever wondered who decides the IPO listing price?

Before the listing price is announced there is a pre-opening session where different parameters that are discussed above are determined.

On analysis, the syndicate of investment banks who are performing the IPO through book-building.

Conclusion

Now coming to the end, one can easily learn the basics of calculation and other parameters affecting the listing price.

So, when thinking to apply for IPO, not only on the issue price but also the different national and global factors along with the supply & demand should be considered to grab better and higher IPO listing gains.

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