Issue Price Vs Listing Price: The past few years have been magical for companies going public. India saw a substantial number of companies file their DRHP to go public, and the growth in investor participation has added to this trend.
An IPO (Initial Public Offering) is when a private company decides to list its shares on the stock exchange, where the public can buy and sell its shares.
Before they can actually go public, companies must file a document called DRHP or Draft Red Herring Prospectus with SEBI. Prior to this, they need to choose a merchant bank that will assist the company in going public along with the necessary documents.
After SEBI’s response, along with corrections to be made, the DRHP will have to be refiled with the necessary changes. When you read through the DRHP, you’ll come across multiple terms such as Offer For Sale, Fresh Issue, promoters, etc.
We’re going to compare two crucial terms – Issue Price Vs Listing Price and write why it’s risky to confuse the two terms and use them interchangeably.
Issue Price – Meaning & Importance
To take the company public, the promoters have to work with investment banks for many reasons, including determining the ideal price for their shares.
Besides determining the share price of the to-be-listed company, they must also market the IPO to gain investors’ interest and raise awareness. The issue price is the price of the new security that is offered for sale for the very first time to the public.
The issue price is important as it determines the valuation per share of the company, how much money it can raise in the IPO and the affordability of the shares. The price point of the shares is important as it determines the ideal price of the shares.
If the price is too low, it may affect the company’s plans on raising money through the IPO, and if the issue price is too high, it might not attract enough investors.
Demand for the company’s IPO is also a deciding factor for the issue price. If the DRHP of the company shows very positive sales, low debt, and market leadership, investors might have better motivation to invest in the company. This could result in the company setting a higher issue price.
Listing Price – Meaning & Importance
When a newly listed company’s shares debut in the market for the first time, the price at which it lists is known as the listing price.
The listing price may not be the same figure as the issue price, as it depends on different factors such as the demand for the IPO, public interest, the company’s scope for future growth, investor participation, market conditions, etc.
Companies get listed after their three-day IPO after investors subscribe for the shares. The listing price is decided by the supply and demand of the shares. On its first day on the bourses, new securities undergo a process called price discovery, where the listing price is determined by all the orders of buying and selling it receives.
The listing price can be one of three on the listing day – At a premium, at par, or at discount. If the demand exceeds the shares offered by the company, its listing price will be higher than its issue price. The new shares will effectively be listed at a premium price.
If the demand is below the number of shares offered by the company, it will get listed at a discount. In rare cases, the listing price will be at par with its issue price, however, market volatility will eventually move the share price.
Issue Price Vs Listing Price – What’s The Difference?
It can be easy to confuse the issue price vs listing price. But there are a few differences that make it easy to decide how they are different and make a clear differentiation in your mind.
- One of the main differences is the issue price is the price at which the shares are sold for the first time, which happens during the IPO subscription period. Keep in mind that the shares are not listed yet, but are open to subscription by investors during the IPO.
- But the listing price is the price of the shares it is traded on the stock exchanges after the IPO.
- The issue price is decided by the company and its investment banks, but the listing price is based on the demand and supply for the newly listed security.
- The motivating factor behind the issue price is the amount of money a company wants to raise in the IPO, while also aiming for a higher valuation. This is why they determine the issue price with the help of investment banks. The listing price is not pre-determined and is decided by external factors of supply and demand.
An IPO can be an amazing investment opportunity, or it could be a pitfall. How do you know if you’re making the right decision? One way is through experience, but that does come with a risk of losing money.
Another option would be to learn about IPOs and market-related subjects like “Issue Price Vs Listing Price”. To unlock knowledge on investing, trading, and the markets, visit the blog section or sign up to Join Fingrad.
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