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. Public Offering Price (POP)

    The public offering price (POP) is the price at which new issues ...
  2. Distributing Syndicate

    Distributing syndicate is a group of investment banks that work ...
  3. Eating Stock

    Eating stock refers to the forced purchase of a security when ...
  4. Undersubscribed

    Undersubscribed is a situation in which demand for IPO securities ...
  5. Death Star IPO

    Death Star IPO is a company's highly anticipated initial public ...
  6. Issue

    An issue is the process of offering securities as an attempt ...
Related Articles
  1. Investing

    What's the role of an investment bank?

    Investment banks provide financial advice to businesses and governments and help them raise capital through the sale of stocks, bonds and other products.
  2. Investing

    5 Tips For Investing In IPOs

    Are you thinking of investing in IPOs? Here are five points to consider before jumping into the initial public offering market.
  3. Personal Finance

    Roles and Functions of Modern Investment Banks

    Discover the different roles and functions that surrounds investment banks, and the role they have played throughout the evolution of the modern system.
  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. 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.
  6. Trading

    Greenshoe Options: An IPO's Best Friend

    Greenshoe clauses can be contained in the underwriting agreement of an IPO. Find out how companies can boost their initial public offering price with these little-known options.
  7. Small Business

    Why Companies Stay Private

    Many private companies prefer to stay private and find alternate sources of capital. Find out what firms have to gain by eschewing the windfall from a flashy IPO.
  8. Insurance

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

    Learn how flipping activity affects an initial public offering.
RELATED FAQS
  1. Do Underwriters Make Guarantees to Sell an Entire IPO Issue?

    Underwriters do not necessarily make guarantees concerning selling an initial public offering (IPO). Read Answer >>
  2. What are the advantages and disadvantages for a company going public?

    Companies often use an initial public offering (IPO) as a way to generate capital. There are both advantages and disadvantages ... Read Answer >>
  3. IPO versus private placement: What's the difference?

    Understand the differences between private placements and initial public offerings (IPO) that companies use to raise capital ... Read Answer >>
  4. How does an IPO get valued?

    Learn how the price of a financial asset traded on the market is set by the forces of supply and demand. Read Answer >>
  5. How is a company's stock price and market cap determined?

    A company's market cap is represented by its outstanding number of shares multiplied by its stock price, which is initially ... Read Answer >>
Trading Center