Question

Why is it so difficult to determine the appropriate price for an IPO? Who do you think has the most input: the issuing firm, the underwriter, or investors? Explain 200 words.

Answer 1

IPO stands for initial public offering that is when the shares of the company are offerred to the public for the first time. The price of the shares are determined due to supply and demand and since the shares are offerred to the public for the first time the supply and demand cannot be determined hence difficult to decide the price.

An issuing firm is a corporation, government, agency, or investment trust that sells securities, such as stocks and bonds, to investors through an underwriter as part of a public offering or as a private placement.

Underwriter is a bank or other financial institution that undertakes to buy all the unsold shares in an IPO.

An investor is a person that invests in the securities with the expectation of a future financial return.

Hence all the three parties play an important role in determining demand and supply therefore input of all the three are important.