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How is IPO Priced or Valued?

How is IPO Priced or Valued?

An IPO or Initial Public Offering is when a company first sells shares of stock to the public. In India, this process is regulated by the Securities and Exchange Board of India (SEBI). A company must be listed on a stock exchange and have at least three years of financial statements that a SEBI-registered auditor has audited.

What is an IPO price?

It is the price at which the shares are offered. The company and its investment bankers set it. They look at the current market conditions and try to price the shares so that they will sell well. It is important because it sets the stage for how well the stock will do in the secondary market. If the stock does well, it will be because investors are willing to pay more than what they could have gotten it for in the IPO. If the stock does not do well, it may be because the company was overvalued or because there was not enough demand for it.

How is an IPO priced?

The initial price of shares or stocks to be offered in an IPO is determined before the launch. Either it can be done using the fixed cost method or the book building method. The price of an IPO is set by the investment banks that underwrite the deal. The banks will look at the company's financials, its growth prospects, and the demand from investors to come up with a price range for the IPO. The final price is determined by how much demand there is from investors. If there are more buyers than sellers, the price will go up. If there are more sellers than buyers, the price will go down.

IPOs are usually priced at the high end of the estimated range to ensure that they are successful. This means that companies usually raise more money than they would if they priced their IPOs at the low end of the range.

How demand affects the price of an IPO?

If there is more demand for shares than available, the price will go up, and the company will be able to sell more shares and raise more money. However, if there is less demand than shares available, then the price will go down, and the company will have to sell fewer shares and raise less money.

Investors typically assess many components when deciding whether to purchase shares in an IPO, including the company's track record, financial condition, bona fides and its ability to progress regarding profitability.

What are the factors that can affect the price of an IPO?

IPO value is determined by a number of factors, including the company's financial stability, growth potential, and competitive landscape. Investors will often pay close attention to a company's IPO value to determine whether it's a good investment. After all, no one wants to overpay for something that may not be worth much in the long run. However, it's important to remember that IPO value is just one piece of the puzzle when making investment decisions.

When a company decides to go public, several factors can affect the price, including:

-The overall market conditions: If the stock market is doing well, demand for new IPOs will be higher and vice versa.

-The sector: Certain sectors, such as technology, are typically more volatile than others and may see more fluctuations in IPO prices.

-The company's financials: A company with strong financials is more likely to see a higher demand (and price) for its IPO than a company with weaker financials. If investors believe in the team's ability to grow the business, they'll be willing to pay more for shares.

-The size of the offering: A large offering will typically result in a lower price per share than a smaller offering. 

-The existing price of the stock.

-The total number of stocks that are being sold.

-The growth of the company equally plays a role in deciding the price.

What are the components of IPO valuation?

Demand: The most crucial factor in IPO valuation is demand. This includes the demand from institutional investors, who will buy large blocks of shares, and the retail demand from individual investors.

Industry Comparables: Another important factor is industry comparables. This looks at other companies in the same industry that have already gone public and uses their share price and market capitalization as a benchmark for the new IPO.

Growth: Growth potential is also key, as investors will want to see that the company has room to grow and expand its business.

What are the methods of IPO valuation?

For an investor, IPO valuation is essential because it gives them an idea of how much they could make if they invest in the company. It also helps them assess the risk involved in investing, as a more volatile stock may be riskier than one that is more stable. IPO valuation is just one tool that investors use to decide where to put their money.

Valuation of stock can be an essential part of investment decision-making. The methods that are commonly used for valuation are:

The Absolute Valuation Approach: The absolute valuation approach involves estimating the intrinsic value of a stock, which is the theoretical price that a rational investor would pay for the stock. This intrinsic value is based on factors such as the company's earnings power, growth prospects, and risk profile.

The Relative Valuation Approach: The relative valuation approach compares the stock's price to similar stocks or other financial assets. This allows investors to see whether the stock is under or over-valued relative to its peers. A relative valuation can help identify opportunities, but it is important to remember that it is only one tool in the investment decision-making process.

The Discounted cash-based Approach: Discounted cash-based approach is a method of IPO valuation that discounts the expected cash flows to the present value. It compares the present value of the cash flows to the current market price to determine if the company is over or under-valued. If an investor believes that a stock will be expected to grow at an above-average rate, then they can use a growth model to determine fair value. 

The Economic Valuation Approach: Economic valuation is a method of IPO valuation that takes into account the firm's economic value rather than just the market value. It is based on the premise that a firm's value is not just the market price of its stock but also includes the present value of all future cash flows. 

What is the role of the underwriter in pricing an IPO?

As the name suggests, underwriters play a critical role in pricing an IPO. They are the ones who determine how much demand there is for the shares and what price will attract enough buyers to sell all the shares.

Underwriters use a variety of methods to assess demand and come up with a price. They talk to potential investors, banks that might lend money to buy the shares, and analysts who cover the stock. All this information helps them determine a price to ensure all the shares are sold.

Once the underwriters have a price they think is fair, they approach the company selling the shares and negotiate a final price. This can be different from their initial assessment, but it's still based on what they believe is achievable in the market. After all, their ultimate goal is to get the best possible price for their client.

What is SME IPO?

An SME IPO is a public offering of shares by a small or medium-sized enterprise. In India, an SME is defined as an enterprise with a maximum turnover of Rs 1 billion and a maximum of 250 employees.

SME IPOs offer several benefits to companies, including improved visibility, increased liquidity, and access to capital. However, they also come with certain risks, such as greater scrutiny from investors and regulators.

SME IPOs are conducted in two markets - the main board and the SME board of BSE (Bombay Stock Exchange). The listing requirements for these boards are different; hence, companies need to decide on which board to list their shares on before filing for an IPO. 

The process of an SME IPO in India is similar to that of a regular IPO with a few exceptions. For instance, SEBI has prescribed a minimum subscription amount of Rs. 2 lakhs for retail investors. 


In conclusion, the article provides a detailed explanation of how an IPO is priced or valued. It is important to remember that IPO pricing is not an exact science. The process is complex and takes into account many factors. Still, the most important thing to remember is that the market sets the price. However, you can be better prepared to make informed investment decisions by understanding the basics of how IPOs are priced and valued.

Frequently Asked Questions (FAQs):

Q. How do I value a company's stock?

First, you need to look at the company's financial statements. This will give you an idea of how much money the company is making and its expenses. Next, you need to look at the company's history. This will help you see how well the company has performed in the past and if there are any red flags, you should be aware of. Finally, you need to compare the company's stock to other stocks in its industry. This will help you see the potential upside or downside in the stock.

Q. What is the face value of an IPO?

In India, the face value of an IPO is the price set by the company for its shares. This price is usually determined by the company's board of directors and is based on many factors.

Q. What is an IPO subscription and what does it indicate?

The subscription period is when an IPO is announced and when it starts trading on the stock market. During this time, potential investors can decide whether or not they want to buy shares in the company. The number of subscriptions received can be a good indicator of how successful the IPO will be.

Q. What is Oversubscription in IPO?

Oversubscription occurs when demand for shares in an IPO exceeds the number of shares available. This can happen for various reasons, including positive buzz around the company and high anticipated growth potential. When oversubscription occurs, IPO shares are allocated using a lottery system.

Q. What are the things to know before investing in an IPO?

First, you should research the company. What does it do? How long has it been in business? What is its track record? 

Second, you should understand the risks involved.

Finally, you should have an exit strategy. That is, you should know when you plan to sell your shares.

Q. What is an IPO listing?

In India, companies must be listed on a stock exchange to sell public shares. India's two major stock exchanges are the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE).