What is an 'Offering Price'

An offering price is the per share value at which publicly issued securities are made available for purchase by the investment bank underwriting the issue. A security's offering price includes the underwriter's fee and any management fees applicable to the issue. The term offering price is almost exclusively used in reference to the initial public offering (IPO) process, although it could apply to other securities such as bonds, structured investments and so on. 

BREAKING DOWN 'Offering Price'

The offering price is set by the lead manager of an IPO. Underwriters analyze numerous factors when attempting to determine a security's offering price. Ideally, an investment bank assesses the current and near-term values of the underlying company and sets an offering price that is fair to the company in terms of capital and fair to investors in terms of potential value for risk. In practice, supply and demand play a large role in the pricing. There are many examples where an offering price is set much higher than any intrinsic value can justify based on the perceived market appetite for shares in the sector or industry a company operates in as opposed to solely focussing on that particular company.

Setting the Offering Price

Setting the offering price is more Hollywood script writing than high finance, especially when high profile private companies go public. The syndicate handling the IPO wants to set the offering price high enough that the company going public is happy with the amount of money raised, but just low enough that the opening price and the trading on the first few days of listing provide a nice IPO pop as the public finally gets a chance at shares. This IPO pop makes for good news and also helps to mask any unloading if early stage investors choose to cash out from the company. While this IPO pop makes for good headlines, it can be frustrating for some venture capitalist as it represents a discount they’ve taken on their investment if they sold their holdings at the offering price pre-IPO.

Offering Price and Opening Price

The offering price was, and sometimes still is, referred to as the public offering price. This is a bit misleading as almost no individual investors are able to purchase an IPO at the offering price. The syndicate generally sells all the shares at the offering price to institutional and accredited investors. The opening price, therefore, is the first opportunity for the public to purchase shares and it is set purely by supply and demand as buy and sell orders queue up for the first day of trading. Individual investors shouldn’t be too upset about missing out on the offering price, however, as many IPOs hit a patch of post-IPO blues where they can be snapped up below the offering price as initial market expectations and a company’s performance in reality finally collide.

RELATED TERMS
  1. Initial Public Offering - IPO

    An initial public offering is when a private company or corporation ...
  2. Public Offering

    A public offering is an organization’s sale of equity shares ...
  3. Public Offering Price (POP)

    The public offering price (POP) is the price at which new issues ...
  4. Pot

    Pot is the portion of a stock or bond issue that investment bankers ...
  5. Underwriter Syndicate

    An underwriter syndicate is a temporary group of investment banks ...
  6. Book Building

    Book building is the process by which an underwriter attempts ...
Related Articles
  1. Investing

    The Road To Creating An IPO

    Through an Initial Public Offering, or IPO, a company raises capital by issuing shares of stock, or equity in a public market. Generally, this refers to when a company issues stock for the first ...
  2. Investing

    Initial Public Offering (IPO) Explained

    An initial public offering (IPO) marks the start of a company's publicly traded life. Find out why companies undergo IPOs, and how the process works.
  3. Investing

    IPOs Are Becoming Less Attractive for Companies

    U.S. companies are choosing to be acquired instead of going public
  4. 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 ...
  5. Investing

    Market Volatility, Weak Economy Delay Major IPOs

    These outside factors can delay and affect IPOs when they are finally listed on a stock exchange.
  6. Insurance

    IPOs For Beginners

    IPO is one of the few market acronyms that almost everyone is familiar with. Discover if IPOS are worth all the attention.
  7. Investing

    8 High Risk Investments That Could Double Your Money

    8 high-risk investment vehicles that can double investors' funds.
  8. Investing

    AMC Prices Secondary at $31.50, Shares Fall

    AMC Entertainment priced at secondary offering at 31.50
RELATED FAQS
  1. What does "going public" mean?

    Going public refers to a private company's initial public offering (IPO), thus becoming a publicly traded and owned entity. ... Read Answer >>
  2. Is there a time limit that must pass before short sales are accepted for IPOs?

    The quick answer to this question is that an IPO can be shorted upon initial trading, but it is not an easy thing to do at ... Read Answer >>
  3. What are some roles of an investment bank?

    Explore the world of investment banking and discover the various functions investment bankers serve, such as handling IPOs ... Read Answer >>
Trading Center