An initial public offering (IPO) is a common way that a private firm goes public and sells shares to raise financing. There are two common types of IPOs: a fixed price and a book building offering. A company can use either type separately or combined. By participating in an IPO, an investor can buy shares before they are available to the general public in the 澳洲幸运5官方开奖结果体彩网:stock market.

Fixed Price Offering

Under fixed price, a company 澳洲幸运5官方开奖结果体彩网:going public determines a fixed price at which its shares are offered to investors. Thus, the investors know the 澳洲幸运5官方开奖结果体彩网:share price before the company goes public. Demand from the markets is only known once the issue is closed. To partake in this IPO, the investor must pay the full share price when making the application. This process may not yield the most accurate results in terms of share pricing because the price is set before investor interest is measured.

Book Building Offering

Book building is the preferred way for a company to price IPO shares. With book building, the lead underwriting investment bank works with the company to determine a price range for its shares based on factors including the growth forecast for the company, its net worth, its earnings per share, and more. The price range the issuer and underwriter agree upon is referred to as the 澳洲幸运5官方开奖结果体彩网:price band.

Once the price band is set, the bank sends out a draft prospectus to potential investors. They, in turn, submit bids specifying the number of shares they want to ℱbuy and how much they are willing to pay. In this way, the book is "built" as bids come in, giving the company's management an idea of✤ market interest in its shares.

The book ♈is open for a predetermined amount of time. When it is closed, the underwriter eval꧙uates the bids to come up with a share price, and accepted bidders are allotted shares.

Fixed Price vs. Book Building: What's the Difference?

There are several factors that explain the differences between these two types of IPO.

Pricing: For a fixed price issue, the price of a company's shares is set or "fixed" on the first day of its listing and then printed on the order document. For a book building IPO, the share price is determined after aggregating the demand from bids, which takes into account investor interest.

Demand: With a fixed price issue, demand isn't known until after the closing of the issue. But with a book building issue, demand can be gauged on a daily basis.

Payment: Investors have to pay 100% in advance for the share price of a fixed price issue at the time of bidding for shares. In a book building issue, payment is made after shares have been allotted.

Setting Up an IPO

When a firm decides to go public, it must hire an investment bank to take care of the IPO. Although a company could go public on its own, it rarely happens. A firm can hire one or more investment banks to handle its IPO. By hiring more than one bank, the risk is spread among the banks, which place their bids for the IPO with the amount of money they anticipate earning. This process is referred to as 澳洲幸运5官方开奖结果体彩网:underwriting.

When the firm goes public, and the investment banks come to an agreement on the underwriting, the banks prepare a registration statement that must be filed with the U.S. 澳洲幸运5官方开奖结果体彩网:Securities and Exchange Commission (SEC💎). The statement contains important financial information on the IPO, including 澳洲幸运5官方开奖结果体彩网:financial statements, names of the board of directors, legal issues, and how the financing is to be used. Once the SEC reviews the paperwork, it determines the date of the IPO.

Participating in an IPO

When participating in an initial public offering, there are several details an investor should know, such as the issue name, issue type, category, and price band, to name a few. The issue name is the firm going public. The issue type is the type of IPO: fixed-price or book building. There are three IPO investor categories: 澳洲幸运5官方开奖结果体彩网:retail investors, non-institutional investors, and 澳洲幸运5官方开奖结果体彩网:qualified institutional buyers.

Not all retail brokers offer IPOs to their clients, and so IPOs are usually allotted to qualified or institutional investors first. IPOs also can tend to be riskier than established stocks since they do not yet have a track record of performance or a history of publicly available financial statements that can be analyzed.

The Bottom Line

Two types of IPO are fixed price and book building offerings. The latter is more commonly used and recommended by the major stock exchanges, as it helps determine a price based on market interest. One downside, however, is that it can have high costs.