Definition of Issue Price
The issue price, or offering price, is the price at which a new issue of shares is sold to the public during its initial offering. Once the securities are issued, they begin trading in the secondary market, where their price may differ from the initial issue price, depending on demand and supply dynamics.
Few Examples
Example 1: Initial Public Offering (IPO)
In an IPO, a company wanting to go public might set an issue price of $20 per share based on the advice of its stockbrokers and bankers considering factors such as market conditions, investor interest, and financial health of the company. When trading begins, the shares might open at $25, indicating a market price at a premium to the issue price.
Example 2: Issue by Tender
A company may choose to issue shares by tender, wherein investors submit bids specifying the price they are willing to pay. The issue price is then established at the highest price that allows the entire issue to be sold. For instance, bids ranging from $15 to $20 per share are received, and the issue price is set at $18 per share.
Example 3: Placing Shares
In a private placing, shares might be issued to select investors at an issue price negotiated by the issuing house or broker. For example, a company and its broker might agree on an issue price of $10 per share for strategic investors willing to support long-term growth.
Frequently Asked Questions (FAQs)
What factors influence the issue price of shares?
The issue price can be influenced by multiple factors including the company’s financial health, market conditions, investor demand, past performance, industry trends, and the advice from stockbrokers and bankers.
How is the issue price determined in an IPO?
In an IPO, the issue price is typically established through collaboration between the company, its underwriters, stockbrokers, and bankers. They analyze market conditions, demand forecasts, and valuations to set an appropriate price.
Can the market price of a share differ from its issue price?
Yes, the market price of a share often differs from its issue price. It can trade at a premium (above the issue price) or at a discount (below the issue price) based on investor demand, market sentiment, and overall economic factors.
What is the difference between an issue price and a market price?
The issue price is the initial price at which new shares are offered to the public, while the market price is the ongoing price at which shares trade in the secondary market. Market prices fluctuate due to buying and selling activities.
What is an ‘issue by tender’?
In an issue by tender, prospective investors submit bids for the shares, indicating the quantity they wish to purchase and the price they are willing to pay. The highest price that sells the entire issue becomes the issue price.
Related Terms
Initial Public Offering (IPO)
An IPO is the process through which a private company offers shares to the public for the first time.
Public Issue
A public issue is a method through which securities are offered and sold to the general public.
Offer for Sale
An offer for sale involves existing shareholders selling their shares to the public, usually to invite broader ownership.
Placing
Placing involves selling securities directly to pre-selected investors rather than the general public.
Tender Offer
A tender offer is a proposal by an investor to purchase some or all of shareholders’ shares in a company at a specified price.
Online References
- Investopedia: Initial Public Offering (IPO)
- Investopedia: Public Issue
- Investopedia: Offer for Sale
- Investopedia: Placing
- Investopedia: Tender Offer
Suggested Books for Further Studies
- “Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions” by Joshua Rosenbaum and Joshua Pearl
- “IPO Banking: The New Regulatory Order” by Georgina Murray and Michael Beeson
- “Public Financial Management”, written by Howard Frank
- “Modelling IPO Methods” by Marc Goergen
Accounting Basics: “Issue Price” Fundamentals Quiz
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