The price of an IPO is decided by the supply and demand of the trade market. Usually, they are sold at the price at which the buyer would like to buy. Doesn’t it sound too simple? In reality, the process of valuation isn’t that easy. If an IPO is underpriced, then a chance of pocketing the gains after the listing is for a long period. On the other hand, if it is overpriced, post listing you won’t get much gain. Any keen follower of latest IPO news would have clearly observed this in the performances
The stock prices of different businesses are valuated using different techniques such as:
The company and its underwriters work together to come up with a share price. Factors which influence pricing are,
The quantity of stocks being sold in an IPO
The organizational set-up of the private company
The current prices of the stocks of similar companies in the same sector
Company’s growth potential
Company’s business model financial effectiveness
General overall market trend
The demand from the potential customers for company’s stock
Sometimes, the company’s success story, the values they believe in, products they offer may also affect pricing.
Absolute valuation is when the company’s basic value is estimated against the market value using the company’s fundamentals. By using these techniques they arrive at per share value.
Value of equity = Enterprise value + Value of cash and investments - Value of debt and other liabilities
Relative valuation works by comparing the company in question to similar companies in the same business. That is why it is also called comparable valuation.
To value an IPO, a business hires an investment bank to underwrite the securities. They are paid to make the offer price look lucrative. They certify that the price accounts every relevant inside information of the past performance and the future payoffs.
Stock share value is usually based on the tangible value of the underlying assets. By using the balance-sheet information enclosed in the prospectus, potential investors can compute an accurate share value to help establish whether the market has correctly priced the IPO shares.
Refer to the IPO calendar; look for upcoming IPO news to know about the new entrants of the stock market. Start researching about the company and evaluate it yourself before you make an investment in an IPO.