Think: volatile IPO, pre-pricing. Lots of ambiguity. Is this company AMZN? Or is it uh...Groupon. Or worse?
The offering price is the price the bankers are setting such that buyers...buy. So if a given company is going to come public by selling 10 million shares at an offering price of $20, then the company itself might keep $19.50 times 10 million, or $195 million; the bank keeps 50 cents a share, or $5 million. If the IPO is hot, then the first publicly traded print might be like $32.40 and go up from there. That price doesn't matter to the company, however. They've already sold their 10 million shares at $19.50, "under pricing" themselves by a dozen bucks or so a share.
And this whole notion of under pricing is kind of a kitschy click-bait-getting thing from journalists who don't really live inside or understand the trenches of how companies actually come public. In fact, IPOs generally "need to be" under priced so that there is certainty of getting all the shares placed, and so that if the markets are choppy, the IPO price doesn't trade below the offering price. If it does, then original buyers who paid $20 will be angry and not return when the stock is at $18 or $15 or $10. Huge work then to repair damaged relationships.
So, in fact, in most cases, it's the company itself who leans conservative in the pricing of their IPO, because they'd rather raise a bit less money, sell a few fewer shares, but have a public currency...than wrest evey penny from the offering and then go into a soft market (through no fault of their own) and have their IPO be quickly underwater, and lose sponsorship from the Street. If they get greedy later, they can always sell more shares in a secondary offering at that $32-ish price and go nuts. High-priced nuts.
Related or Semi-related Video
Finance: What is a primary offering, and...28 Views
finance a la shmoop what is a primary offering and what are primary shares all
right people let's start with the primary offering it's pretty much just
an IPO or initial public offering of stock that's primary and hello 1933 Act [The 1933 securites act is slid onto a desk]
that's what gave rise to all the regulations around primary offerings its
original shares virgin ones in fact now being offered for the first time to an [Someone holding 'extra virgin stock']
investor public primary offering that's what it is
but primary shares also come from private companies like a venture capital [Sign for a venture capital company]
company might buy primary shares in a b round from whatever.com as that company
funds its growth now once a company is already public its shares will have
traded back and forth in many different hands over time those would be called [Secondary shares stamp]
secondary shares and hello 1934 Act which set the regs all around
secondaries so yeah primary 1933 secondary 1934 and well that's pretty
much it as long as you can count to two this one's a pretty easy concept to
would wrap your head around.. primarily.. [Woman looks confused]
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