How IPO Listing Price is Decided

IPOs have created a lot of buzz in the stock market recently so much that it has become the major investment product for a lot of people. The majority of the time, the reason behind the IPO investment is to get the benefit of IPO listing gains. But the question is: how IPO listing price is decided?

But before diving into the details, let us have a look at what is IPO listing?

IPO Listing

Let us start with IPO meaning, so it is a process through which a private company gets public and officially listed in the stock exchanges. IPO listing signifies the process of the company getting visible and ready for further trading activities on the IPO listing date. The listing process happens usually after 3 days of IPO allotment.

After the IPO is officially listed on the stock exchanges, it gets accessible and easy to trade. You can then place buying and selling orders for the same.

Now the IPO listing price plays an important role in determining the profits and also the popularity of the company. So now let us have a look at how the IPO listing price is decided.

How Listing Price Is Calculated?

We have now talked about the significance of the listing price, there are various factors that impact how good an IPO will list on a listing day and the chances of profits to the investors. So, let us now shed some light on the various factors influencing the IPO listing.

1. Demand

The listing price of an IPO is decided by the market demand of the company and the IPO. The higher the demand, the higher the listing price. The demand for the IPO is affected by several factors including the sector, the growth potential, and the expected valuation.

If the demand for IPO is more, then it is oversubscribed and because of this not a lot of investors will get the allotment. This will result in higher listing prices as more and more people will trade it in the secondary market because of higher demand.

So a high demand and low supply can result in great listing prices and therefore, great listing gains and vice versa.

2. Growth Prospects of the Company

The companies come up with an IPO with various objectives including paying debts, investing in operational costs, etc. Now, this also affects the listing of an IPO. If the company has intentions and ideas of growing and expanding their business, the retail investors will also be interested in investing in the same.

This will increase the orders, thus increasing the demand, and therefore increasing the listing price. The company is likely to list at good prices if there is the potential for growth.

3. Grey Market Premium

Grey market premium is an additional amount that the investors are ready to pay to buy IPO shares or applications.

But here is the question, why GMP is important in IPO?

A grey market is a place that is unregulated but sheds light on the demand for an IPO. It is the additional price that an investor is willing to pay in addition to the offer price.

For example, if the offer price of an IPO is ₹200 and the grey market premium is ₹50. This means that an investor is willing to pay ₹250 for the same in the grey market. Now, this is because of the increasing demand for the IPO.

A lot of people rely on the GMP to decide, whether or not they should invest in an IPO. If the offer price is ₹1000 and the GMP is ₹250, the IPO is likely to get listed for ₹1250.

But, the case is not always correct. Higher GMP does not always mean that the IPO will get a good listing. An example is the Easy Trip IPO, wherein the GMP was showing a strong listing but it got listed just 2% over the premium.

4. The OFS Value

The offer for sale of an IPO means the number of shares that an existing investor is willing to dilute with the IPO. If the OFS is more than a fresh issue, then it certainly means that there is some reason why the current investors don’t want to be a part of the company anymore.

This might be a turn-off for some investors. But it is not always the case, if the growth potential of the company is strong, it might perform great.

But greater OFS values can affect the listing prices negatively.

5. Market Sentiments

Retail investors play an important role in deciding the performance and hence the listing price of an IPO. Therefore, the market sentiments are also widely affected by the interest of the investors further resulting in the decision making of the listing price.

A comparative analysis of the peers can also affect the market sentiments. If the investors are looking interested and the market sentiments are positive, it is a good indication. But if there is a lack of interest, there are higher chances that the IPO listing price might not be that good.

These are the various factors that majorly affect the listing price of an IPO. So, when wondering how to choose an IPO, you should always look out for these factors.

Conclusion

Good IPO listings can give you great profits and also increase the visibility of the company. There are several factors that help in deciding the listing price of the company including, the investors’ interest, GMP, but majorly the demand and supply of the IPO.

If you are thinking of applying for an IPO, you need a demat account, so why not open a demat account today!