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Types of IPOs

We’ve discussed Initial Public offering process in detail . IPOs are how companies get listed on stock markets. To get in on the action, you must be familiar with the IPO investment tips and strategies . You should also know the different types of IPOs there are, which is why we’re here to discuss every detail.

Key Points

  • In a Fixed Price Issue, the price of the offerings are evaluated by the company along with their underwriters.
  • In a book building issue, there is no fixed price, but a price band.
  • In a fixed price issue, you need to pay 100% of the price of the share at the time of bidding for the share, but in case of book building issue, the payment can be completed after the allocation.

First, a quick recap.

What are IPOs?

An Initial Public Offering or IPO is the first offering of shares to the public. Prior to an IPO, the company has a small number of shareholders (founding members and angel investors). You, as a retail investor, cannot buy shares of a company until the company offers to sell its shares to the public. To buy the shares of a company not listed on the stock market; you can approach the owners of the company but they are not obliged to sell you their stocks. Launching an IPO is often called ‘going public’, as public companies offer a portion of their shares to be traded in the stock market, to the public.

But launching an IPO isn’t very straight-forward:

Types of IPOs

Generally there are two types of IPOs. A company gets a boost when people start buying their equities. The two basic types of IPOs are

  • Fixed Price Issue
  • In a Fixed Price Issue, the price of the offerings are evaluated by the company along with their underwriters. They evaluate the company's assets, liabilities, and every financial aspect. They then work on these figures and fix a price for their offerings. The price is fixed after considering all the qualitative and quantitative factors. In a fixed price issue, the fixed price may be undervalued during the company’s IPO. The price is mostly lower than the market value. As a result, investors are always very interested in fixed price issue and ultimately revalue the company positively.

  • Book Building Issue
  • A book building issue is a comparatively new concept in India compared to other parts of the world. In a book building issue, there is no fixed price, but a price band or range. The lowest and the highest price is called ‘floor price’ and ‘cap price’ respectively. You can bid for the shares with the desired price you would like to pay. Thereafter the price of the stock is fixed after evaluating the bids. The demand of the share is known after each day as the book is built.

An IPO can be done through Fixed Price Issue or Book Building Issue or a combination of both.

Differences between Fixed Price issue and Book Building issue:

  • Price: The price of the share is fixed on the first day of the listing in fixed price issue and is printed in an order document whereas, in book building issue only the price band is fixed initially, the exact price is not fixed. Only after the closing date of bid, the exact share price is fixed.
  • Demand: The demand in a fixed price issue is known only after the closing of the issue whereas, in a book building issue, the demand for the share is known after each day.
  • Payment: In a fixed price issue, you need to pay 100% of the price of the share at the time of bidding for the share, but in case of book building issue, the payment can be completed after the allocation.
Wrapping Up

  • IPOs can be of two types - a fixed price issue, or a book building issue.
  • In a fixed price issue, the price of the offerings are evaluated by the company along with their underwriters.
  • In a book building issue, there is no fixed price, but a price band or range with an upper price and a lower price.
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