What Is Price Talk?
Price talk is the discussion of the appropriate price for an upcoming security issue. During the price talk phase, the investment community will discuss and debate a reasonable range of prices within which it's estimated the new security should be sold. Price talks commonly occur before an initial public offering (IPO) or a bond issue. Because price talks occur before the actual security issuance, they can help investors gain the insight needed to make an investment decision.
- Price talks occur when members of the investment community—such as dealers, investors, and brokers—discuss and debate the reasonable range of prices for an upcoming security issue.
- Some investment banks provide their customers with price talk prior to a security auction, giving those customers valuable insight into the new issue.
- Price talks are common before initial public offerings (IPOs) and the issuing of bonds, such as auction rate securities (ARS).
- A price talk often occurs as part of a Dutch auction, a type of public offering auction in which investors place quantity and price bids for a security.
Understanding Price Talk
Price talk occurs when dealers, investors, and brokers analyze and debate the price of a new security before the security is issued. Comparisons are made to benchmarks, such as past issues by the same entity or similar securities. Some investment banks, such as JPMorgan Chase & Co. (JPM), provide their customers with price talk prior to the auctions of securities, allowing the clients insight into the new issue.
Price talks occur for IPOs and bond issues, such as auction rate securities (ARS). Many potential investors of a new security will use price talk as one factor in their decision-making process before making an investment.
Price Talk and Dutch Auction
Price talk can be observed in the Dutch auction process, where the prices and interest rates of securities are set after taking in all bids and determining the highest price (or lowest yield) at which the total offering can be sold. Prior to the auction, brokers discuss the range of possible yields or spreads with their clients.
This discussion is referred to as price talk, and it gives clients and prospective investors a basis for probable rates, though investors are free to submit bids outside of this range. Price talk provides an indication of the yield or spread that the issuing entity and the underwriters expect to bring the new financing. When price talk is given in yield, it provides some reference as to what the coupon rate on a bond will be. Price talk on spreads is more often done with investment-grade securities.
Investors enter a competitive bidding process by submitting bids that specify the number of shares they are willing to purchase and the lowest yield they would be willing to accept from the bond. The yields submitted fall within the range of yields discussed by underwriters. Bids are accepted until the deadline after which the auction agent calculates the clearing rate based on the submitted bids.
The clearing rate is the interest rate that will be paid on the securities until the next auction. If the investor’s bid rate is less than the clearing rate, the investor will receive all or at least part of his or her desired bid. Bids placed above the clearing rate will not be filled.
The range of prices discussed for a new issue is not always readily available from third parties. Discussions about the appropriate price for a new security typically precedes the IPO of a company's stock or upcoming bond issue. Early price talk occurs just as the new issue is announced, and the official price talk occurs closer to when the security will be priced.