When it comes to Initial Public Offerings (IPOs), the pricing strategy employed can fall into one of two distinct categories. The choice between these types hinges on the approach the company or underwriter wishes to adopt in generating the offering price. These categories are:
1. Fixed Price Offering:
In this method, the company takes the lead in establishing the initial price for its stocks. Buyers or investors, in turn, commit to paying this predetermined amount per share to acquire the desired number of stocks. The price is essentially set in stone, providing clarity to investors from the outset.
2. Book Building IPO:
Contrasting the fixed price model, the Book Building IPO involves a more dynamic pricing mechanism. Here, the company establishes a price band for the upcoming IPO, featuring a floor price (the minimum) and a cap price (the maximum). Bidders then participate in a range-based bidding process within this specified bracket. The ultimate pricing decision is a collaborative effort between the underwriter and the company’s investors, informed by surveys assessing the perceived value of the shares. Selected investors secure stocks based on the outcome of this bidding process, introducing a dynamic element to the pricing strategy.