- It’s a dance between the issuing company and an investment bank or banks. The company hires these underwriters to manage the IPO. They don’t work for free, naturally; they’re compensated with a percentage of the IPO’s value, what’s often called an “underwriting fee”.
- The underwriters undertake a comprehensive analysis of the company, scrutinizing financial performance, growth prospects, and market conditions. A lot like hunting for truffles, except the truffles are in balance sheets and sales forecasts.
- They compare this company with similar ones already trading on the market. This process, known as “comparables” analysis, involves assessing the company against a selected peer group based on key financial metrics and ratios.
- With all that data, the underwriters propose an initial price range for the IPO. It’s a bit like haggling in the bazaar – but the bargaining happens in boardrooms and over long spreadsheets.
- Then comes the “roadshow”. No, not like a circus, more like a debutante’s ball. The company and underwriters present their case to institutional investors, mutual funds, and sometimes even high-net-worth individuals. The goal? To generate interest and get preliminary commitments to buy the shares.
- Based on the feedback and demand from the roadshow, the underwriters finalize the IPO price. This is what investors will pay for each share on the first day of trading.
- On the big day, the stock hits the market. If all goes according to plan, supply meets demand and the price holds or even better, goes up. But it’s a fickle world – it can also drop if demand isn’t as high as expected.
Like any market process, it’s part science, part art. But that’s the gist.