What is 'Book Building'

Book building is the process by which an underwriter attempts to determine at what price to offer an initial public offering (IPO) based on demand from institutional investors. An underwriter builds a book by accepting orders from fund managers, indicating the number of shares they desire and the price they are willing to pay.

BREAKING DOWN 'Book Building'

As initial prices are provided by investors, the book is created by listing the information provided during the predetermined time period before the book is considered to be closed. During this time, the underwriter focuses on getting information from potentially large-scale buyers and investors, as this gives an overview of what those most interested in purchasing the stock are willing and able to pay. Once closed, the underwriter analyzes the information to determine the initial selling price, also known as the issue price, for the particular offering.

Even if the information collected during the book building suggests a particular price point is best, that does not guarantee a large number of actual purchases once the IPO is open to buyers. Further, it is not a requirement that the IPO be offered at that price suggested during the analysis.

IPO Pricing Risk

With any IPO, there is a risk of the stock being overpriced or undervalued when the initial price is set. If it is overpriced, it may discourage investor interest if they are not certain that the company’s price corresponds with its actual value. This reaction within the marketplace can cause the price to fall further, lowering the value of shares that have already been secured.

In cases where a stock is undervalued, it is considered to be a missed opportunity on the part of the issuing company; it could have generated more funds than were acquired as part of the IPO.

Understanding the IPO Process

The IPO transitions a company from private ownership to a publicly traded company, allowing outside investors to purchase shares in the company and bringing the company a new source of revenue.

In order to begin the IPO process, the company must file with the Securities and Exchange Commission (SEC). Once the filing is complete, a group of bankers, known as the underwriters, begin to work on generating an appropriate initial price for the IPO. An appropriate exchange is then selected, and large-scale investors are sought during a period referred to as the road show. Once all of those stages are complete, a date is set for the distribution of shares to buyers found during the road show, and sales open to the general public.

RELATED TERMS
  1. Public Offering Price - POP

    The price at which new issues of stock are offered to the public ...
  2. Underwriter

    An underwriter is a company or other entity that administers ...
  3. Lead Underwriter

    A investment bank or other financial outfit that has the primary ...
  4. Negotiated Underwriting

    A process in which both the purchase price and the offering price ...
  5. Eating Stock

    The forced purchase of a security when there are insufficient ...
  6. Offering Price

    The price at which publicly issued securities are made available ...
Related Articles
  1. Insurance

    Is Insurance Underwriting Right For You?

    If you have excellent analytical skills and an eye for detail, this may be your calling.
  2. Insurance

    What is Underwriting?

    Underwriting is a term most often used in investment banking, insurance and commercial banking. Generally, underwriting means receiving a remuneration for the willingness to pay for or incur ...
  3. Insurance

    What Does an Underwriter Do?

    In the investment world, an underwriter is a company that helps corporations or other issuing bodies distribute their securities.
  4. Managing Wealth

    Top 6 Performing IPOs of 2015 (ONCE, GBT)

    2015 has produced a mixed year for initial public offerings, with small biotechs overcrowding the winner’s list.
  5. Insurance

    What is a Greenshoe Option?

    A greenshoe option is a provision in an underwriting agreement that allows the underwriter to buy up to 15% of the shares in an IPO at the offer price.
  6. Insurance

    IPO Flippers And The Companies Who Hate Them (TWTR, ETSY)

    Learn how flipping activity affects an initial public offering.
  7. Trading

    Greenshoe Options: An IPO's Best Friend

    Find out how companies can save or boost their public offering price with these options.
  8. Investing

    Top Reasons IPO Valuations Miss The Mark (MS, ZNGA)

    The costly services of investment banks don’t necessarily guarantee accuracy in IPO pricing.
  9. Investing

    5 Tips For Investing In IPOs

    Thinking of investing in IPOs? Here are five things to remember before jumping into these murky waters.
  10. Investing

    How An IPO Is Valued

    The initial valuation of an IPO can determine the success or failure of a specific stock - but how is that price determined?
RELATED FAQS
  1. What does the underwriter do in a new stock offering?

    Learn the role an underwriter plays for an initial public offering, and the steps an underwriter takes in preparing for an ... Read Answer >>
  2. Do underwriters make guarantees to sell an entire IPO issue?

    Underwriters represent the group of representatives from an investment bank whose main responsibility is to complete the ... Read Answer >>
  3. What are the different types of IPO issued?

    Learn about the two ways for a company to go public: fixed price and book building. Under fixed price, the share price is ... Read Answer >>
  4. How does insurance underwriting differ from investment underwriting?

    Understand the difference between insurance underwriting and investment underwriting, including what types of risks an underwriter ... Read Answer >>
  5. How does an underwriter syndicate work together on an initial public offering (IPO)?

    Learn how underwriting syndicates work together when helping a company undertake an initial public offering, and learn about ... Read Answer >>
  6. What are examples of risks for all underwriter types?

    Learn about the risks faced by different types of underwriting activity. Explore specific examples of risks faced by insurance ... Read Answer >>
Hot Definitions
  1. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  2. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  3. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  4. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  5. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  6. Four Percent Rule

    A rule of thumb used to determine the amount of funds to withdraw from a retirement account each year. The four percent rule ...
Trading Center