|
|
Under-pricing and Overpricing of IPOs
Home » Investing » Initial Public Offering » Under-pricing and Overpricing of IPOsIn the world of IPOs, generally under-pricing is a good thing. Most IPOs worldwide are under-priced. This makes the initial face value of the IPO very intriguing in the stock market when it is first publicly traded which leads to enormous increases for those investors who jumped on the IPO early. The negative aspect to under-priced IPOs is lost capital that had the stock been offered for a price closer to its worth, could have been raised for the company.
Although under-priced IPOs can have a down side, overpriced IPOs seem to carry more risks. If a particular stock is made available to the public at a greater price than the market is willing to pay, underwriters can face difficulty keeping their pledge to sell shares. Even when everything runs smoothly and all the issued shares of an overpriced IPO have been sold, if the stock market decreases in value on the initial day of trading, the IPO's marketability and value may be lost.
The key for investment banks is to settle on an offering price that is low enough to perk curiosity in the stock, but high enough to result in a sufficient gain of capital for the company.
Related Initial Public Offering Articles
- What is an initial public offering?
- How do initial public offerings work?
- What are the legal issues of an IPO in the United States?
- Where do IPOs fall in the business cycle?
- Under-pricing and Overpricing of IPOs
- How does a Dutch auction work with an IPO?
- How does a bought deal work with an IPO?