IPOs are the most preferred type of investment. However, they are tricky and come with a lot of terms and conditions. There are many terminologies we often need clarification on within IPOs. Two of these terms are bid price and bid quantity. Let’s understand these terms in detail.
In a book-building issue of an IPO, a bid price stands for the price that the investor is ready to pay for the IPO shares. It is also known as the buyer’s price. The bid price is often compared with the ask price- also called the seller’s price. It is the price that the company asks you to pay for its IPO.
An order is executed only when these prices match. Then, either the seller has to reduce the ask price, or the buyer has to increase the bid price for the order to be executed.
For example, if you want to buy shares in an IPO of company ABC. The price range of the company is Rs. 105 to Rs. 100. You bid for the price of Rs. 102. Now, if the company lists its cut-off price at Rs. 103, you will not be allotted those shares. Whereas, if the cut-off price is Rs. 102, you would be allotted those shares.
Thus, the bid price plays an important role in an IPO.
Other than IPO, if you want to sell your shares in the market, you would put forth an ask price. If a buyer is interested, they will put forth their bid price. If both these prices match, your order would be executed.
Bid Quantity in an IPO stands for the number of shares you want to buy. In an IPO, you cannot buy single shares. Instead, a company decides the minimum amount of shares that an investor can buy. This is known as the lot size. A lot can have multiple numbers of shares. For example, if a company decides to make a lot of 10 shares, with each share costing Rs. 100. One lot would be priced at Rs. 1000.
When investors bid in an IPO, they apply for multiple numbers of lots. If the IPO is undersubscribed or sufficiently subscribed, you are allotted the number of shares you want. But if there is a huge oversubscription, your chances of receiving the number of lots you want to decrease.
Bid price and bid quantity are important terms in the stock market and IPO. While the bid price reflects the price that you bid on, the bid quantity tells about the number of shares you want from an IPO.
If your desired bid price is not availed in the IPO, your money, blocked during the IPO application, is released. Similarly, you would also receive a refund of the bid quantity if you received a lesser quantity than you bid for.