When it comes to bidding in an IPO, the way we approach the bid varies greatly depending on the method used to allot the shares. In this article, we will try to better understand book-building IPO and the best approach towards bidding in this category.
Book building IPO
The book-building process is used during an initial public offering (IPO) to determine the price of the shares being offered and allocate the shares to investors.
- The first step of the book-building process is the “road show”, where the company and the investment banks (underwriters) meet with potential institutional investors to present the company’s financials and prospects.
- Next, the underwriters will set an indicative price range for the shares, which gives investors an idea of the likely price range for the shares.
- Investors will then submit “indicative bids” for the shares, specifying how many shares they want to buy and at what price.
- Based on the share demand, the underwriters will set a “final price” for the shares, which will be the price at which the shares will be sold.
- Once the final price is set, the shares will be allocated to various investors who have placed orders. The allocation will be based on a variety of factors, including the number of shares requested, the price bid, and the type of investor (e.g. retail vs institutional).
- Finally, the shares will be delivered to the investors, and the stock will begin trading on the stock exchange, usually on the next trading day.
It’s worth noting that the book-building process varies by jurisdiction and the specific rules and regulations of the stock exchange where the company is listed.
Bidding at the cut-off price during a book-building IPO
You can indicate your willingness to pay for shares within the advertised price range through the cut-off price in an IPO. It makes you eligible for allotment at any discovered issue price. It suggests that you are fine with any price within the respective price range. Using the cut-off option significantly increases your chances of receiving share allotment.
- Certainty of allocation: By bidding at the cut-off price, you are more likely to receive the number of shares that you have requested, as the underwriters will allocate shares to investors who have bid at or close to the cut-off price.
- Reduced risk of overpayment: The cut-off price is determined by the underwriters based on demand for the shares and is intended to reflect the fair market value of the shares. You can reduce the risk of overpaying for the shares by bidding at the cut-off price.
- Reduced risk of under allocation: Many IPOs are oversubscribed, meaning that there are more orders for shares than those available. By bidding at the cut-off price, you can increase your chances of receiving at least some of your requested shares.
- Ability to participate in the IPO: Some IPOs have a minimum bid price, and by bidding at the cut-off price, you may participate in the IPO, especially if you don’t want to bid at a higher price.
It’s worth noting that a cut-off price is not always the best option, sometimes the demand is low, and the company offers the shares at a lower price than
Bidding at the cut-off price is the best way to approach a book-building IPO. If you are new to this sector and are confused about the right platform, Shoonya is your answer. Shoonya is a multi-asset trading platform where you can create a free Demat account and trade for free because Shoonya offers some advanced features like modifying or cancelling IPO orders at lifetime zero brokerage.