DEFINITION of 'Underpricing'

The pricing of an initial public offering (IPO) below its market value. When the offer price is lower than the price of the first trade, the stock is considered to be underpriced. A stock is usually only underpriced temporarily because the laws of supply and demand will eventually drive it toward its intrinsic value.

BREAKING DOWN 'Underpricing'

It is believed that IPOs are often underpriced because of concerns relating to liquidity and uncertainty about the level at which the stock will trade. The less liquid and less predictable the shares are, the more underpriced they will have to be in order to compensate investors for the risk they are taking. Because an IPO's issuer tends to know more about the value of the shares than the investor, a company must underprice its stock to encourage investors to participate in the IPO.

  1. Liquidity

    The degree to which an asset or security can be quickly bought ...
  2. Law Of Supply

    A microeconomic law stating that, all other factors being equal, ...
  3. Law Of Demand

    A microeconomic law that states that, all other factors being ...
  4. Asymmetric Information

    A situation in which one party in a transaction has more or superior ...
  5. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs ...
  6. Intrinsic Value

    Intrinsic value is the actual value of a company or an asset ...
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