Offering Price
Candlefocus EditorThe offering price can provide investors with important insight into the company's true potential, as the investment bank will analyze the company's business model, financials, current and projected performance, competition and more. analysts will then use a variety of methods to arrive at an offering price, including the comparable companies method which looks at the market performances of similar businesses, or the discounted cash flow method which applies a multiple to project the future value of the company's cash flow.
Generally, the investment bank will set the initial offering price somewhere between the estimated value and what the market can bear for the stock. This price will go through one of two rounds of approval. First, the Securities and Exchange Commission (SEC) will review the price and then the stock exchange where the stock will list will also review and sometimes reject the price based on their internal rules.
Once the offering is live, the stock prices will be driven by market forces, and the stock price may exceed or fall short of the offering price. For example, it is very common to see a stock experience a "pop" after the offering and the price exceed the offering price. However, there are many examples of stocks that failed to hold above their offering price after the IPO. While the offering price can provide us with insight into the offering and inform us of the company's legitimacy, the real value of the stock is determined by the markets and will likely over time be divorced from the offering price.
Overall, offering prices are crucial to the IPO process, and are based on the company's legitimate prospects. Investors should be aware that the offering price does not guarantee the future performance of the stock, as this is dependent on the markets.